in swaps, reading 40… i’m getting confused with the duration signs… wasn’t duration of bonds supposed to be always negative… then why do we have negative and positive durations… something to do with issuer and holder of bonds but not getting it.
If you sell the fixed payments you are negative duration
could you please elaborate…
If you are the receiver of fixed payments that has a high duration (Payments are fixed so so the asset is more sensitive to interest rate changes i.e. higher duration). So if you swap your fixed cash flows for floating cash flows you are essentially shorting duration as a floating rate instrument is less sensitive to interest rate movements.
- Fixed Rate has a higher duration than floating, usually .75/year and 0.25 for 6 month reset 2) In a swap, if you’re paying fixed and receiving floating then you are short fixed and long floating - you’re swap duration is negative i.e. -0.5 Hope it makes sense…
Whatever you receive in the swap adds to your duration (i.e. increases its absolute value). Whatever you pay/sell/give out takes away from your duration. So a swap can increase or decrease your duration, just like treasury/eurodollar futures. It just depends what side of the trade you’re on. Fixed payments have the duration you’d expect from a similarly structured bond. Floating payments have 0 duration when they reset, and for many purposes, you can assume they have 0 duration. Strictly speaking, between a reset and the next reset, you do have some interest rate risk, which is just equal to the length of time (in years) until the next reset. For semi-annual payments, this ranges from 0.5 immediately after reset to 0 on the day of reset, averaging out to 0.25 over time. So you can pay or receive fixed, depending on whether you want to increase or decrease duration.
Thanks everyone… i kept thinking in terms of interest rates and asset prices… duration is positive - and i was wondering why will mkt value increase if interest rates increase… so the negative and positive just indicate whether you are reducing or increasing ur duration… Thanks