swaps duration ---Please Help

CFA Level III
#1

Can somebody explain me how swaps affect duration of assets, equity in the portfolio? ************************************************************** If i enter pay fixed receive floating swap, the duration of my portfolio should go down, correct? My portfolio = assets - liability ? I substituted cash flow risk for market risk, because I now have fixed payments instead of floating? Also Schweser page 194 before title"Using Swaps to Change Duration" “Since the duration of the floatin-rate liability has been substantially incrased by entering the fixed-for floating swap, the net duration of the firm liabilities has increased. This reduces the resulting duration of the firms assets, meaning market value risk has been reduced” I don’t get it

#2

for swap duration think of the cash flows…so if you PAY that’s a negative so…if you’re paying fixed, then your swap’s duration would be +short duration (floating) - long duration (which is the fixed) so your portfolio’s duration decreases. fixed for floating is a receive fixed, pay floating if i’m not mistaken.

#3

Here, the notes are talking about the duration of “liabilities”. Thus, atpr, your understanding of “fixed-for floating” is correct. You used to have a float liabilities. Then you pay fixed, received float. Your liabilities become fixed. Thus, your duration increased.

#4

Also, the duration of a Floating that resets say semi-annually is .25 and quarterly is .125. So if you have a pay floating, receive fixed, semi-annually, for 3 years. The Duration of the SWAP would be roughly, say -.25 + 1.5 (3 x .5) = +1.25.

#5
  1. swap where you pay fixed, receive floating + having a fixed liability (after a swap), means higher liability duration + having higher liability duration menas lower overall duration because overall duration is equal to duration of your assets minus duration of your liabilities 2. swap where you pay floating, receive fixed + having a floating liability (after a swap), means lower liability duration + having lower liability duration menas higher overall duration because overall duration is equal to duration of your assets minus duration of your liabilities does it make sense to you, guys? thx
#6

hala_madrid Wrote: ------------------------------------------------------- > 1. swap where you pay fixed, receive floating > + having a fixed liability (after a swap), means > higher liability duration > + having higher liability duration menas lower > overall duration because overall duration is equal > to duration of your assets minus duration of your > liabilities > what if your asset duration is low to start with (say 0.25), does your conclusion still hold?

#7

hi randOm, to be honest, no idea right now… what do you think will happen? thx

#8

suppose the company initially has asset duration = 0.25 and liability duration = 0.25. its overall duration is zero. => the basic idea of ALM. now, if the company decidies to swap out its floating liability for a fixed one, as you said, liability duration increases, since asset duration remains at 0.25, the company becomes exposed. in this case, your conclusion doesn’t hold.

#9

sorry, I don´t see it. If liability duration increases and asset duration remains the same, doesn´t overall duration decrease? thx rand0m (sorry for those of you whom I am confusing more)