MD question

so if MD(A) = MD(L) + MD(E) say we take a receive fixed, pay floating swap… what is our impact on the above equation?? i am wrestling with this point…

Receiving fixed = long duration

i got that… but what is the impact for this baby: MD(A) = MD(L) + MD(E)

Fixed asset = MD(A) Goes up Floating Liability = MD(L) Goes down MD(E) = changes somehow

DO YOU BITE YOUR THUMB AT ME SIR!!!

i bite my thumb but not at you… i like your answer…works for me…

I just saw this in Schweser “Since the fixed for floating swap has increased the liability duration without changing the duration of the assets, the duration of the firms equity has fallen.” So I guess I was wrong. Just focus on the liability piece keeping Assets constant and that’ll tell you what happens to equity.

Mr.Good.Guy Wrote: ------------------------------------------------------- > I just saw this in Schweser > > “Since the fixed for floating swap has increased > the liability duration without changing the > duration of the assets, the duration of the firms > equity has fallen.” > > So I guess I was wrong. Just focus on the > liability piece keeping Assets constant and > that’ll tell you what happens to equity. Recieving fixed is like having an asset generating fixed income, should increase asset duration. Pay floating is considered a liability, should increase liability duration. As fixed duration is longer than floating duration, adding recieving fixed swap should increase equity duration. Where did you see this in Schweser?

Ummmm …I dont think a swap is an asset.

book 4, pg 194… i marked down that I thought it would be errata because if A= L + E …something didn’t add up… check pg 194 and see if that makes sense, maybe i am wrong…

Well I think I am wrong. They just add the increase/decrease from swap duration to the liability duration.

Mr.Good.Guy Wrote: ------------------------------------------------------- > DO YOU BITE YOUR THUMB AT ME SIR!!! ^ Needs study break in bad way.

Yeah I got a nice sleep in… I can remember lines from stupid Romeo and Juliet but just can’t remember how to hedge that foreign denominated bond…