Okay… I’m trying to understand this simple concept from both the point of view of the ISSUER and the point of view of the RECEIVER. I’m a bit confused on this. As far as I can see, for someone receiving payments: * Receive Fixed Duration > Receive Floating Duration (time period to next reset is essentially the duration so if it’s close to the reset time, duration is close to zero). Where i get muddled is in viewing things from the point of view of the ISSUER. This applies when looking at Interest Rate Swaps. I see the following on page 191 from Schweser’s Notes: Dpay floating = Dfixed - Dfloating > 0 Can someone explain the above to me. This formula applies to who?? It says it applies for the “pay floating counterparty”. Is the pay floating counterparty the person that is paying fixed? Would really love an explanation on this part of this topic… I know this is an easy concept but for whatever reason my head is in a million places right now and would love clarification on this topic. Thanks PJstyles
there are several posts about this… for me: duration of a receive floating (an asset) and pay fixed (liability) swap is equal to duration of the floating coupon bond (the asset) minus duration of the fixed coupon bond (liability) duration of a receive fixed (an asset) and pay floating (liability) swap is equal to duration of the fixed coupon bond (the asset) minus duration of the floating coupon bond (liability) usually (I guess there are plenty of situations where this does not hold), duration of the fixed coupon bond is higher than duration of the floating coupon bond (specially using the CFA rule of duration of a floating coupon bond equal to 0.5 times time to next reset), so duration of the first swap (receive floting, pay fixed) is lower than the duration of the second swap (receive fixed, pay floating) hope this helps
this duration is for the party that pays floating. the meaning of the equation is - the party owns both an asset that produces fixed payment and a liability of paying floating. so, from asset’s standpoint, the net is duration of asset minus duration of liability.
think in terms of the cash flow. issuer of a pay fixed swap: -fixed + float therefore decrease in duration to the issuers portoflio. receiver of a pay fixed swap: +fixed - float therefore an increase in the duration of the receivers portfolio.
strikershank… I love that response… doesn’t get any clearer than that… Thanks!! PJStyles