Application of Derivatives - Lehigh

CFA Level III Derivatives
#1

Application of Derivatives - Lehigh

Based on the data in Exhibit 2, modifying the duration of the fixed-income allocation to its target will require an interest rate swap that has notional principal closest to:

Target is 3. Current Duration is 5. Bond Portflio is 10mill. Cacluate NP. Assuming rates rise.

Swap A - maturity of 2 yrs. D = -2.125

Swap B - maturity of 3 yrs. D= -3.375

Swap C - maturity of 4 yrs. D = -3.625

My question is how do we know which swap to pick? Answer selects Swap C without any justification. What did I miss?

#2

Longest is cheapest

#3

ah ok. thanks for that.

#4

Always choose the swap with the highest net duration; it’ll give you the lowest notional principal.

#5

a swap with the lowest duration (in this case the most negative) will require the lowest notional principal, hence it is the cheapest

#6

I couldnt figure the rationale out either but you could also just solve for NP on each, the only one that showed up as an answer choice was the correct one.