Derivatives question re: duration of bond swaps

CFA Level III
#1

Hey everyone,

Does anyone have a general rule of thumb for when to use 0 vs. 0.25 for the duration when using swaps to alter allocations or duration? I can’t understand why CFAI uses 0 in some cases or 0.25 in others. If you have an 80/20 equity/fixed mix and want to change to a 60/40 mix I thought you would use 0 target beta to reduce equity and then 0 again as the initial duration to increase bonds…but I just saw a question use 0.25 for the initial duration in such a scenario and now I’m confused. Thanks.

#2

I have only seen examples where 0 is used

#3

I believe that the default CFA Institute position is ½ the time between payments; if they want you to use zero, they’ll say so.

#4

Where was the question? I’ve only seen them use 0 in questions like this

#5

That’s weird.

I’ve seen them use 0.25 years as the duration on the floating leg of a semiannual-pay swap, but never as the duration of the mid-flight portfolio in a derivative-based asset reallocation overlay.

Please tell us more about this question.

#6

when the position is being sold to convert to cash - the cash is assumed to have a 6 month duration -> average duration = 0.25.

exhibit 7, pg 337.