Volume 5 page 223 - swap duration why is a pay float (issue float) duration -ve? Bottom of page 223 the duration of a pay float position is -0.125. if interest goes down and you pay float, you pay less. shouldn’t the duration be +ve then? while we are at it, can someone explain to me why is the duration of a pay fixed bond -ve and the duration of a receive fixed bond +ve? thanks.
Something is wrong with the first. The second is the usual duration def’n.
when you recieve a cash flow it affects your portfolio’s duration by lengthening it. if you pay a cash flow its a negative duration as the payment is an outflow from your portoflio (and thus helps offset the duration of the payments you recieve). so for a pay float the CFAI books assume that the duration is usually 1/2 the time from payment to payment. In the example you posted (i don’t have the books with me to double check) it woudl appear they pay floating swap would be a quarterly swap.