trying to re-wrap my head around Leveraged Floater - hedge, arbitrage strategy from readin 43 When a semi-annual leveraged floater is sold, say at 2.5 times Libor, does it sell for a premium, above the par?
Haven’t reviewed it…make sense, pay more to receive a 2.5xLIBOR payment.
Damn that isnt in schweser Sounds very logical though. if a floater is priced at par then given discount would still be the same with higher coupons then it should be sold at a premium. Just to see if my logic is correct does this make sense: to hedge that leveraged floater you would need to have a higher notional (by a factor of 2.5) on the swap to account for the higher ‘amount’ of libor being swapped? eg $100m floater 2.5 Libor swap is for example 4% for libor. so you would need 100*2.5=250m swap notional to account of the leverage? thanks
right, makes sense then. Don’t forget the third leg of the arb. strategy where you’d buy a bond with face = 2.5 * 100 = same as Swap