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Understanding Interest Rate Swaps ​

This page explains what a fixed-vs-floating swap is and how Jetty implements it on Solana.

1. What a Swap Does ​

Concept ​

A swap exchanges cash flows based on two rate legs:

  • a fixed leg
  • a floating leg

No principal is exchanged. Only PnL from rate differences is settled.

Example ​

You hold exposure to a variable borrow APR and want predictability. You enter pay-fixed/receive-float to offset borrow-rate increases.

Technical Detail ​

In Jetty, each position stores:

  • signed notional
  • locked fixed rate
  • last settled floating index snapshot
  • expiry timestamp

2. How Jetty Settlement Works ​

Concept ​

Funding settlement is lazy: it happens when the position is touched by a transaction.

Example ​

If you do not trade for several hours, the next interaction settles all accumulated index movement since the prior touch.

Technical Detail ​

text
funding_delta = notional * (floating_index_now - floating_index_last)

The delta is applied to realized_pnl_wad, then floating_index_last is updated.

3. Mark-to-Market (Unrealized PnL) ​

Concept ​

Unrealized PnL reflects the value of closing now at the current mark rate.

Example ​

If market fixed rates move in your favor versus your entry rate, unrealized MTM is positive and account health improves.

Technical Detail ​

MTM depends on:

  • current mark rate
  • entry fixed rate
  • signed notional
  • effective time to expiry

4. Expiry and Historical Oracle Proofs ​

Concept ​

Expired positions must settle using the oracle index at expiry time, not the current index.

Example ​

A position expires at T. You close it later at T + 2 days. Final funding still uses the proven historical index at T.

Technical Detail ​

Jetty verifies a Merkle proof from OracleHistory and interpolates the index inside the proved interval when needed.

5. Risk You Should Track ​

  • Market risk: mark moves against your position.
  • Funding risk: floating index moves against your signed notional.
  • Liquidity risk: larger trades face larger impact.
  • Oracle risk: stale or incorrect oracle updates can distort settlement.
  • Liquidation risk: health below maintenance enables partial liquidation.

6. Practical Workflow ​

  1. Choose market and expiry tenor.
  2. Choose direction and notional.
  3. Check quoted fixed rate, fee, and margin impact.
  4. Open position.
  5. Monitor health and realized/unrealized PnL.
  6. Reduce or close before expiry when possible.

Next Reading ​

Jetty Protocol