sample 2. - swap & credit risk

i really need someone to help me out. as far as i know, V(swap) = PV(fixed) - PV(floating). If the value of a swap at a time is negative, then the side that receiving fixed and paying floating is lossing money and therefore facing NO credit risk. what did i do wrong? or is the cfai wrong on this one?

They are receiving fixed = Short side of swap. To the Negative is a Positive to the Short side… My beef with that question is they ask about Current Credit Risk which there is 0 b/c the Swap still have 2 months or so to go…there is the Potential of the 450K or so whatever it was… That really chaps my a$$

bigwilly Wrote: ------------------------------------------------------- > They are receiving fixed = Short side of swap. To > the Negative is a Positive to the Short side… are you saying V(swap) = PV(floating) - PV(fixed)?

The annoying part is the way they stated it: Recieve Fixed, Pay Floating = Your Short the Swap Pay Fixed, Receive Floating = Your Long the Swap Receive Floating, Pay Fixed = Your Short the Swap Pay Floating, Recieve Fixed = YOur Long hte Swap

bigwilly Wrote: ------------------------------------------------------- > The annoying part is the way they stated it: > > Recieve Fixed, Pay Floating = Your Short the Swap > Pay Fixed, Receive Floating = Your Long the Swap > > Receive Floating, Pay Fixed = Your Short the Swap > Pay Floating, Recieve Fixed = YOur Long hte Swap That absolutely makes no sense

bigwilly Wrote: ------------------------------------------------------- > The annoying part is the way they stated it: > > Recieve Fixed, Pay Floating = Your Short the Swap (agree!) > Pay Fixed, Receive Floating = Your Long the Swap (agree!) but, i wont change the fact that v(swap) = pv(fixed) - pv(floating). didn’t we learn it all along since L1?

CSK - I’m pretty sure that is how CFAI lays it out. That’s how it was on the Sample Exam, b/c it was written Recieve Fixed, Pay Floating they were SHORT

bigwilly Wrote: ------------------------------------------------------- > The annoying part is the way they stated it: > > Recieve Fixed, Pay Floating = Your Short the Swap > Pay Fixed, Receive Floating = Your Long the Swap > > Receive Floating, Pay Fixed = Your Short the Swap > Pay Floating, Recieve Fixed = YOur Long hte Swap Are they the same? How can it be both long and short? Pay Fixed, Receive Floating = Your Long the Swap Receive Floating, Pay Fixed = Your Short the Swap

bigwilly Wrote: ------------------------------------------------------- > The annoying part is the way they stated it: > > Recieve Fixed, Pay Floating = Your Short the Swap > Pay Fixed, Receive Floating = Your Long the Swap > > Receive Floating, Pay Fixed = Your Short the Swap > Pay Floating, Recieve Fixed = YOur Long hte Swap Hmmm… Long Swap = Fixed Rate Payer correct? All thes play on words is driving me crazy!!! :slight_smile: lol

Elcaro, its because they are two differrent swaps. If I go Pay Fixed and Receive Floating (then I’m the long party), the opposite side is receiving the fixed and paying the floating rate (so they are short)

PJStyles Wrote: ------------------------------------------------------- > bigwilly Wrote: > -------------------------------------------------- > ----- > > The annoying part is the way they stated it: > > > > Recieve Fixed, Pay Floating = Your Short the > Swap > > Pay Fixed, Receive Floating = Your Long the > Swap > > > > Receive Floating, Pay Fixed = Your Short the > Swap > > Pay Floating, Recieve Fixed = YOur Long hte > Swap > > Hmmm… Long Swap = Fixed Rate Payer correct? > All thes play on words is driving me crazy!!! :slight_smile: > lol “The party that pays fixed and receives floating coupon rates is said to be long the interest swap.” From wikipedia. As i said there can be only 1 Long and only 1 Short. When you go ‘long’ in interest swap it means you are going long the interest rate

comp_sci_kid Wrote: ------------------------------------------------------- > PJStyles Wrote: > -------------------------------------------------- > ----- > > bigwilly Wrote: > > > -------------------------------------------------- > > > ----- > > > The annoying part is the way they stated it: > > > > > > Recieve Fixed, Pay Floating = Your Short the > > Swap > > > Pay Fixed, Receive Floating = Your Long the > > Swap > > > > > > Receive Floating, Pay Fixed = Your Short the > > Swap > > > Pay Floating, Recieve Fixed = YOur Long hte > > Swap > > > > Hmmm… Long Swap = Fixed Rate Payer correct? > > All thes play on words is driving me crazy!!! > :slight_smile: > > lol > > “The party that pays fixed and receives floating > coupon rates is said to be long the interest > swap.” > > From wikipedia. As i said there can be only 1 Long > and only 1 Short. When you go ‘long’ in interest > swap it means you are going long the interest rate I agree with you CSK but there are inconsistencies in CFAI smaples. In one instance the vignette explicitly says that the party longs a swap by paying floating and receivign fixed. In another example, their answer explains that the party is in short position in the swap by paying floating and receiving fiexed.

juve_fan Wrote: ------------------------------------------------------- > comp_sci_kid Wrote: > -------------------------------------------------- > ----- > > PJStyles Wrote: > > > -------------------------------------------------- > > > ----- > > > bigwilly Wrote: > > > > > > -------------------------------------------------- > > > > > > ----- > > > > The annoying part is the way they stated > it: > > > > > > > > Recieve Fixed, Pay Floating = Your Short > the > > > Swap > > > > Pay Fixed, Receive Floating = Your Long the > > > Swap > > > > > > > > Receive Floating, Pay Fixed = Your Short > the > > > Swap > > > > Pay Floating, Recieve Fixed = YOur Long hte > > > Swap > > > > > > Hmmm… Long Swap = Fixed Rate Payer correct? > > > > All thes play on words is driving me > crazy!!! > > :slight_smile: > > > lol > > > > “The party that pays fixed and receives > floating > > coupon rates is said to be long the interest > > swap.” > > > > From wikipedia. As i said there can be only 1 > Long > > and only 1 Short. When you go ‘long’ in > interest > > swap it means you are going long the interest > rate > > > I agree with you CSK but there are inconsistencies > in CFAI smaples. > > In one instance the vignette explicitly says that > the party longs a swap by paying floating and > receivign fixed. > > In another example, their answer explains that the > party is in short position in the swap by paying > floating and receiving fiexed. CFAI if that would be the only inconsistency i would be happy

bigwilly Wrote: ------------------------------------------------------- > The annoying part is the way they stated it: > > Recieve Fixed, Pay Floating = Your Short the Swap > Pay Fixed, Receive Floating = Your Long the Swap > > Receive Floating, Pay Fixed = Your Short the Swap > Pay Floating, Recieve Fixed = YOur Long hte Swap bigwilly, I think you are confusing people with this, it was probably a typo on your part, so let me correct it Recieve Fixed, Pay Floating = Your Short the Swap (this is correct) Pay Fixed, Receive Floating = Your Long the Swap (this is correct) Receive Floating, Pay Fixed = Your Short the Swap (this is incorrect) Receive Floating, Pay Fixed = Your Long the Swap (this would be correct) Pay Floating, Recieve Fixed = Your Long the Swap (this is incorrect) Pay Floating, Recieve Fixed = Your Short the Swap (this would be correct) In the Sample #2, swap in question was Receive Fixed, Pay Floating (with 2 month before maturity, I believe) and the swap had negative market value, which means it was positive value to the short, and I also agree that there is no current credit risk and there is only potential credit risk that the short side has. The only way I can explain the answer that they chose, is the question asked about “credit risk” without specifying current or potential, and since we can say credit risk = current credit risk + potential credit risk essentially, since you can’t have both current and potential credit risk at the same time, that equation would be credit risk = 0 + potential credit risk or credit risk = current credit risk + 0 meaning that anytime you have current credit risk or potential credit risk, you have credit risk applying this logic to the Sample #2 problem credit risk = $0 + $485M (whatever the market value was) hence, value of credit risk was $485M (or whatever that number was) CFAI V5, p.47 has exactly the same example, in this case with a positive market value to the long and they say there is no current credit risk since swap has 30 more days until payment is due, and there is only a potential credit risk. In the Sample, they should of been more clear on what exactly they wanted, rather than just playing with words and having us guess about what the question is really asking.