Got this Q wrong on the Schweser Mock. I’ve typed it below for all you guys who don’t have the exam. There is an analyst (Haswell) who pays a floating rate on a bond, and plans to enter into a payer swaption to hedge his risk because he forecasts interest rates rising. Then Q 39 reads as follows:
If Haswell’s interest rate forecasts prove correct and the appropriate hedge is enacted determine which of the following best describes the effect on Peterson’s cash flow risk and market value risk.
Cash Flow Risk Market Value Risk
A) Decreases Decreases
B) Decreases Increases
C) Increases Decreases
Answer is B. I put A. I know that cash flow risk decreases because he’s no longer paying float. In general, market value risk should increase because he pays fix. However, his interest rate forecast is rising rates. Rising rates are good for a fixed payer, as the MV of liabilities decreases. So doesn’t MV risk go down? Why is the answer not A?