Doing the CFA 2013 mock…question #38. How do you know which swap to use to for the formula or is it just trial and error?
duration was 5
2 of the swaps gave a notional principal that was an answer so I guess it was the duration. Duration alone though would not be the sufficient answer so I am a little confused as to why that one is the right answer and the other one is wrong. The answer doesnt address this either.
I remember that you should use the swap with the smallest notional principal, although the reason why escapes me now.
NP = (dT - dP)/dS * Vp = (3-5)/x * $20M = -$40M/x. Plugging in all the x’s:
NP in $M: Swap A = 18.8235, B = 13.913, C = 11.0345
So use swap C (answer B).