1 A PAY-FIXED (RECEIVE-FLOATING) POSITION IN AN INTEREST RAT...

Section 2.1

A pay-fixed (receive-floating) position in an interest rate swap is similar to issuing a

fixed-rate bond and buying a floating-rate bond with the proceeds. The duration of the

fixed-rate bond is approximately 75% of the maturity, and the swap is short this

duration. The duration of the floating-rate bond is approximately half its repricing

frequency, and the swap is long this duration. Therefore, the duration of the three-year

swap with semi-annual payments is (0.5 × 0.5) – (0.75 × 3) = –2.00.

5.) Is the notional principal of the swap Watanabe recommends to Kondo most likely

correct?

A. No, it is too high

B. Yes

C. No, it is too low

Answer = A

“Risk Management Applications of Swap Strategies,” Don M. Chance