Pay fixed increases mkt risk but not cashflow risk. How? will it not dep on the direction of int rate change since your duration is less.
Yes, because you are paying a fixed amount vs paying a floating amount so that decreases volatilty of cashflow. It increases mkt risk I guess b/c if Interest rates decrease you are stuck paying a higher rate.
i would actually think it is the other way around receive fixed pay floating: higher market risk, lower cashflow risk and pay fixed receive floating: lower market risk, higher cashflow risk. …
i would agree with comp_sci_kid…
receive floating faces CF risk receive fixed faces market risk
hezagenius Wrote: ------------------------------------------------------- > receive floating faces CF risk > receive fixed faces market risk agreed
i concur with csk too.
so what is the answer. I have last year Schweser matl that says Swap would reduce CF risk since you would have locked in a fixed payment by using SWAP. (I think what they mean here is that your cash outflow is constant). Duration of fixed rate payment will be much higher than the duration of the floating payments thus increasing mkt value risk. I am not sure about this. effective
I can understand why being long a floating rate presents CF risk. You do not know with certainty what you will receive. Why does being long a fixed rate present market risk? I seem to recall that since the long fixed side has a higher duration, it is more sensitive to interest rate changes. I guess “more” is the key word here.
this material is in the context of a company with floating rate debt outstanding. they enter into a pay fixed/receive float swap which reduces their cf risk but increases their market risk.
yes, i guess it depends if you pay fixed and entered in receive fixed and pay floating your CF risk increased and your MV risk decreased, and the other way around, it all depends on the situation
Can someone remind me where this questions comes from?