Please advise why the value of the firm’s equity will become more sensitive to changes in interest rates. Schweser’s solution is difficult for me to understand.
Sorry its Book 2.
This is also very confusing for me. According to the problem: Equity = Assets - Liabilities And duration of liabilities decrease with the addition of the swap, which increases the duration of the equity. What I don’t understand is that why with addition of the swap is not spoken from the perspective of net duration. If you have a pay-fixed liability and you add a receive-fixed/pay floating swap, then wouldn’t the net duration increase?
This is also very confusing for me. According to the problem: Equity = Assets - Liabilities And duration of liabilities decrease with the addition of the swap, which increases the duration of the equity. What I don’t understand is that why with addition of the swap is not spoken from the perspective of net duration. If you have a pay-fixed liability and you add a receive-fixed/pay floating swap, then wouldn’t the net duration increase? Unless they actually mean equity = net duration and that it increases.