CFA Mock version B case: Lehigh

Hey all, having trouble with a question.

Lehigh wants to sythetically modify the duration of a position to a target of 3. It is currently 5. Market Value 20M. What is the notational principle of the swap that is needed.

The swaps to choose from are

A 2yr Maturity -2.125 Duration

B 3yr Maturity -3.375 Duration

C 3.5yr Maturity -3.625 Duration

In the answer they use Swap C to figure out the problem. Why is Swap C used?


you have your durations possibly wrongly calculated. I state that just based on the fact that if the swap term fixed were 2 years - duration of the swap would be less than 2. e.g. a 2 year quarterly swap, pay fixed, receive floating - would be -(0.75)(2) + 0.125 = -1.125 and not -2.125 as you have it above.

with regards to your question - the highest swap duration will give you the lowest notional principal.

Hi mate had the same problem this morning … then I figured out that that we have to use the swap with the highest duration (negative duration) so to produce the lowest notional principal. Check pg 453 of the curriculum.

Awesome, I was hoping it’d be an easy answer like that.

Appreciate the help

do we always have to use the highest duration swap? even when we want to increase duration?