Suppose you are in a pay fixed/receive floating swap. This means you are paying a certain amount and receiving an unceratain amount. Is the risk determined by what you pay or receive? I understand that the floating side is what generates the cash flow risk since you don’t know with certainty what that cash flow will be. My question is: does the floating receiver face cash flow risk or does the floating payer face cash flow risk?
cash flow - receive floating market - receive fixed
I think it may be the oppsoite, depending on whose perspective you are examining. For an issuer (coropration) that enters issues a floating rate loan, then subsequnetly enters a swap where the issuer (coporation) is the pay fixed side, they have market value risk and little cash flow risk. This section confused me because I always mixed up if the party to examines is the issuer of the debt instrument or the owner, but if you look at LOS 40c, it seems that the LOS focuses on the issuer where a pay fixed/receive floatiing is common practice and this excanges cash flow risk for market value risk.