Pricing at Expiry
Up to the expiry of the contract, the price of the € Swapnote contract will reflect underlying supply and demand dynamics. At expiry the price is fixed by ICE Futures Europe using the Exchange Delivery Settlement Price (EDSP) algorithm.
The EDSP is the price of a bond which has the € Swapnote notional cash flows. The EDSP is calculated by ICE Futures Europe using zero coupon discount factors calculated from the ISDA® benchmark swap rates at 10:00 (London time) on the Last Trading Day.
For these purposes, the zero coupon discount factors are calculated using a standard 'boot-strapping' technique.
All cash flow payment dates are defined as anniversary dates of the effective date, being the third Wednesday in the delivery month (the 'IMM' date). However, should any of these dates fall on a non-Trading Day, the notional cash flow will be assumed to be paid on the next Trading Day and the notional coupon will be adjusted to reflect this.
Fair Pricing Prior to Expiry
A theoretical arbitrage free 'fair-price' for the € Swapnote contract can be calculated in the same way as with the EDSP.
The 'fair price' is the sum of the present values of notional cash flows valued to the trade date, which are then forward valued to the contract delivery date.
Prior to expiry, the discount factors derived from the current swap rates ruling on the trade date will not coincide with the notional cash flow dates. Accordingly, an interpolation of either the rates or the discount factors will be required. As such, the 'fair price' will depend on what interpolation approach has been adopted.