Ratchet Swap Valuation

A ratchet swap is an interest rate swap with two legs. One leg is a standard floating leg and the other leg is a ratchet leg. The ratchet leg pays a ratchet floating rate.

The ratchet floating rate coupon is based on an index, e.g., 6-month EURIBOR. The rate is further subject to a minimum decrease of 0 bps and a maximum increase of a threshold, such as, 15 bps. These rates are reset two business days prior to the first day of each coupon period.