Have a floating rate debt. Want to convert to fixed rate debt. Enter a swap pay fixed, receive floating. Did this increase market risk or cash flow risk?
I think with this swap I lowered duration so market risk decreased and cash flow risk increased. The answer seems to sugget otherwise. What am I missing?
Is the reasoning related to - I am concerned with interest rates going up that would require higher cash flow going out so I solved that by receiving floating rate in a swap. I am confused, looking for some help to understand this.
Market risk is present on both sides equally, whether you’re long or short.
In your example, you were short floating debt, and replaced it with fixed debt. So the market risk of the fixed pushes it up, and the cash flow of the replaced floating pushes cash flow risk down.
However, this is taken independently of any other assets or liabilities.