Inverse floater

CFA Level III Derivatives
#1

Quick question on the inverse floater- In the situation where we sell an inverse floater (paying float)…then finance it w/ fixed bond…then swap to get a fixed rate…what does this accomplish? (Sorry if this is dumb but what exactly is meant by ‘finance it w/ a fixed bond’? And what is the end result of the position described?

Thnx!

#2

They mean buy a fixed-rate bond so that you can use the coupon payments on that bond to pay the interest on the inverse floater.

If you’re looking at the example in the curriculum, please note that it is flawed.

#3

thanks!

#4

My pleasure.