When one is LONG or SHORT in a derivative transaction do we look from point of view of Cash or Possession.
Considering Stock,Bond, Options,Interest rate, Currencies and Futures
Generally we say one is LONG = BUYER SHORT = SELLER
Would it follow that in interest rate swaps one considered long a rate or short depending on the interpretation of who is a buyer or seller.
Does the same interpretation hold for the borrower or Lender
In a plain vanilla interest rate swap, the party paying the fixed rate and receiving the floating rate is considered the long, and the party paying the floating rate and receiving the fixed rate is considered the short.
In other swaps – fixed for equity, floating for equity, or currency swaps that are either fixed for fixed or floating for floating – there is no standardized long and short.
The easiest way to remember long and short is that if the price of the underlying increases, the long gains and the short loses, and vice versa.
In a plain vanilla interest rate swap (or an FRA, which is essentially a 1-period plain vanilla interest rate swap), the underlying is the floating rate. If it increases the long gains, so the long must be receiving the floating rate, and, therefore, paying the fixed rate.
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