Can someone clarify kindly which duration figure to use when we are working out the notional p?
usually they give a table of available swaps and I always get confused as to which one to pick. Initially I thought it had to be the one that matched the maturity of the underlying, but that didn’t work on another wuestion
any help much appreciated…
I believe you want to use the duration that minimizes the notional. I remember reading that somewhere, hopefully someone else can clarify as well.
yep… choose the highest duration asset as it gives the lowest NP.
As an addendum to this correct statement.
Duration of fixed portion of swap = 0.75 x maturity
Duration of floating portion of swap = 0.5 x period length (e.g. for a semi-annual, duration is 0.5/2 = 0.25)
So it follows that to reduce NP you’d want the longest maturity swap available with the most compounding periods.
awesome, thanks guys that makes sense