Does the floating-rate receiver work to hedge against rises in interest rate?

CFA Level III Derivatives
#1

Hi,

I think the answer is B because it helps to reduce durations, but not 100% confident…
The answer A and C seem to work in the same direction (to increase durations).
Is this understanding correct?

Thank you in advance.

A bond manager believes that interest rates will be rising substantially in the future. The manager can hedge the returns on the portfolio by entering into an interest rate swap as:

A. The floating-rate payer
B. The floating-rate receiver
C. The fixed-rate receiver

#2

For a plain vanilla interest rate swap, A and C are the same thing; if one’s correct, the other’s correct.

Not a well-constructed question.

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#3

If interest rates would rise, you definitely want to shorten you duration.
Pay fixed - negative duration
Receive floating - positive (and shorter) duration
Result of the swap is net negative duration, thus you shorten the duration of portfolio by entering this swap.

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#4

Thank you, S2000magician and Toto_11.

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#5

My pleasure.

#6

Another way to look at it is that you always want to receive a higher rate than you’re paying; when rates are rising, this means that you want to receive the (increasing) floating rate and pay the fixed rate.