What's equivalent to a floating-rate payer?

CFA Level II
#1

It says that a floating-rate payer in a simple interest-rate swap has a position that is equivalent to a series of short FRAs. Another choice was that it is equivalent to issuing a floating-rate bond and a series of long FRAs.

Which one makes more sense to you and why?

#2

the second choice:

(a) if you pay floating rate on a swat then you pay/receive : fixed rate - floating rate

(b) if you issue floating rate bonds then you pay floating : -floating rate

© if you go long fra you receive fixed rate : + fixe rate

then , A = B+C

in case 1 you pay fix to the long part and receive floating by investing the bond at market ( floating rate ). so it’s like being a fixe-rate payer.

#3

I also thought the second choice, but Schweser question says it’s the first!

#4

you’re right, the payoff of a FRA for the long counterparty is: Floating Rate - Fixed Rate

_ The buyer hedges against the risk of rising interest rates, while the seller hedges against the risk of falling interest rates _

so the payoff of the short is : -(Floating Rate - Fixed Rate) = Fixed Rate - Floating

if you pay floating rate on a swat then you pay/receive : fixed rate - floating rate

thanks for making me less idiot today.

#5

That’s correct. Fixed Rate - Floating

I guess the other choice …“Another choice was that it is equivalent to issuing a floating-rate bond and a series of long FRAs.”… was confusing me, because I have no clue what “issuing a series of long FRAs” means! Issuing means selling, so how do you sell a *long* FRA?

Anyway, the answer is a floating-rate payer in a simple interest-rate swap has a position that is equivalent to a series of short FRAs.

#6

if I read carefully , then it means Issuing a FRB + Going long on FRA

so IMO the payoff would be pay fixed , receive floating thru FRB and receice fixed thru long FRA to hedge the position .

I think the answer is “floating-rate payer in a simple interest-rate swap has a position that is equivalent to a series of short FRAs.” because the payoff of floating rate payer replicates that of short FRA , which means issue a forward loan at a FRA rate .

Hope I am not missing anything here

#7

no, you are missing it.

pay off of a FRA is Floating Rate - Fixed Rate for the long. This means that you do not need to issue a FRB