Mock 2009 Q38

Mock 2009 Q38 (case of AS entering into a swap) I answered A, or that the swap reduces the net market value risk. The right answer was C, or that the swap increases the market value risk of AS. Can anyone help me understand why? My logic was the following: 1) Duration of Receive Fixed Swap = Duration of Underlying coupon bond - Duration of underlying floating Rate Bond >0 2) Duration of Pay Fixed Swap = Duration of underlying floating Rate Bond- Duration of Underlying coupon bond <0 3) Receive Fixed rate swaps will then usually lengthen the duration of an existing position while pay fixed swaps will shorten the duration of an existing position. Based on that and on the fact that D(E) = D(A) – D(L) > 0 for most firms, I assumed the swap would reduce the overall duration of equity, hence I selected answer A. Why is it the opposite? Can anyone explain it? thanks The only thing I can think of is: in the case of AS, their duration of equity was very low, and the swap brings it into negative?

Floating rates are exposed to Cash Flow risk Fixed Rates are exposed to Market Risk If you enter to receive fixed to are eliminating the CF risk ( or at least greately reducing it) and increasing Market Value Risk

wow I completely missed the point of this question then. I assumed the “market” risk was the risk of equity … sh!t, teaches me to better read the question …

I am confused on this one. I thought AS enters into a Receive-Floating, Pay Fixed SWAP in order to hedge its floating rate loan. For receive floating, the risk should be cash-flow risk and not market value. Please clarify.