I’m struggling with what I suspect is a fairly basic question: The duration of a pay floating (receive fixed) Swap = Dfixed-Dfloating >0. So the duration of the pay floating is equal to the fixed minus the floating. But what I don’t get: Is the “Dfixed” and “Dfloating” in the formula above the Payfixed, or rec fixed? Is it that the duration of the pay fixed (rec floating) minus the pay floating(rec fixed) > 0? Cause if that’s true, then I don’t get it. I thought the duration of a rec fixed (pay float) would be more than pay fixed? So why isn’t it <0?
Smarshy Wrote: ------------------------------------------------------- > I’m struggling with what I suspect is a fairly > basic question: > > The duration of a pay floating (receive fixed) > Swap = Dfixed-Dfloating >0. > > So the duration of the pay floating is equal to > the fixed minus the floating. But what I don’t > get: Is the “Dfixed” and “Dfloating” in the > formula above the Payfixed, or rec fixed? Is it > that the duration of the pay fixed (rec floating) > minus the pay floating(rec fixed) > 0? Cause if > that’s true, then I don’t get it. I thought the > duration of a rec fixed (pay float) would be more > than pay fixed? So why isn’t it <0? If you’re paying floating, then effectively you’re short floating and long fixed. So, dfixed - floating>0 because as you said, duration of fixed is more than floating (which can be at most time to reset, but for exam purposes is half the reset period unless otherwise stated). Also, a general convention for the fixed side, I believe, is .75 * time to maturity
I had this problem at a point too. So the way I look at it is purchasing a bond. Purchasing a bond=receiving fixed. When you purchase a bond you are exposed to duration. So purchasing a fixed pay bond= high duration Purchasing a floating rate bond= low duration
ng30 Wrote: ------------------------------------------------------- > Smarshy Wrote: > -------------------------------------------------- > ----- > > I’m struggling with what I suspect is a fairly > > basic question: > > > > The duration of a pay floating (receive fixed) > > Swap = Dfixed-Dfloating >0. > > > > So the duration of the pay floating is equal to > > the fixed minus the floating. But what I don’t > > get: Is the “Dfixed” and “Dfloating” in the > > formula above the Payfixed, or rec fixed? Is it > > that the duration of the pay fixed (rec > floating) > > minus the pay floating(rec fixed) > 0? Cause if > > that’s true, then I don’t get it. I thought the > > duration of a rec fixed (pay float) would be > more > > than pay fixed? So why isn’t it <0? > > > If you’re paying floating, then effectively you’re > short floating and long fixed. > So, dfixed - floating>0 because as you said, > duration of fixed is more than floating (which can > be at most time to reset, but for exam purposes is > half the reset period unless otherwise stated). > Also, a general convention for the fixed side, I > believe, is .75 * time to maturity What I’m getting confused by is pay vs receive. REC fixed has more duration that REC float, right? so Dfixed-Dfloating >0 must be referring to the RECEIVE side?
Correct Dfixed - Dfloating is for Fixed Rate receiver.
Right, dfixed-dfloating meands you are receiving fixed, paying float, and fixed higher than float
thx