Quick question to generate some thinking:
How many swaps do I need to reduce portfolio duration to 5.6 year for below:
Current portfolio = $100m, duration 6.0 year
Available IR Swap = duration -1.5 year
CFA’s method would be:
5.6 x $100 = 6.0 x $100 + -1.5 x Swap amount.
But I think it should be:
5.6 x ($100+Swap) = 6.0 x $100 + -1.5 x Swap amount.
e.g. the target would be the what you want to achieve post hedging as a final position.
Maybe because it is derivatives - so doesn’t count as part of the bond portfolio? Would the second formula apply if I am using bond to change portfolio duration instead of derivatives?
Appreciate any insight. Thanks.