Editing Rational pricing (section)

====Valuation at initiation====
Consider a fixed-to-floating Interest rate swap where Party A pays a fixed rate ("[[Swap rate]]"), and Party B pays a floating rate. Here, the ''fixed rate'' would be such that the present value of future fixed rate payments by Party A is equal to the present value of the ''expected'' future floating rate payments (i.e. the NPV is zero). Were this not the case, an arbitrageur, C, could:
# Assume the position with the ''lower'' present value of payments, and borrow funds equal to this present value
# Meet the cash flow obligations on the position by using the borrowed funds, and receive the corresponding payments—which have a higher present value
# Use the received payments to repay the debt on the borrowed funds
# Pocket the difference&nbsp;– where the difference between the present value of the loan and the present value of the inflows is the arbitrage profit