Swaps o nthe exam

Hate to see this topic again on L3, what to expect on the exam for swaps?


I don’t think it’s so bad since it’s just conceptual this time. I’m expecting this to be tested more than say options. CFAI like swaps I think.

I’m expecting them to test effects of swaps on duration of portfolio, maybe also a question on effects on balance sheet assets/etc type question. Maybe also some about swaptions.

Wouldn’t be surprised to see calculation question, but all the examples were relatively simple. The bulk of testing should revolve around how to hedge a certain risk, i.e. which counterparty sould enter into which swap, how the results compare if they didn’t hedge…

porting alpha, hedging a concentrated position, translating future foreign cash flows, changing floating to fixed rate debt (vice versa), etc.

Pretty much anything in which you find it beneficial to trade the return of a current holding for a return from a different exposure.

^ swaps are my weakness. Throw in 2 currencies and I’m done. I really need to work on that this weekend.

I think the foreign cash flows are pretty straightforward.

Pretend the foreign cash flow is an interest payment. So to find the notional value divided by the foreign interest rate (since it is a foreign cash flow). Use current exchange rate to translate foreign principal into domestic principal. Then finally take domestic interest rate times domestic principal to find out the domestic cash flow you are receiving when giving up the foreign cash flow.

Simple 3 steps to remember!