Interest in Interest Rate and Duration

CFA Level III
#1

Could you anyone advise what happens to duration when interest rate increases and we go long a fixed receiver swap?

#2

Swap . . . or swaption?

#3

Swap

#4

Recall from Level I that a swap can be considered a long position in one bond, and a short position in another. If you’re receiving fixed and paying floating, then are you long a fixed-rate bond and short a floating-rate bond, or long a floating-rate bond and short a fixed-rate bond?

#5

We are long fixed rate bond and short floating rate bond.

#6

Which bond has longer (effective) duration?

#7

Fixed rate bond has higher duration in comparison to floating rate bond.

#8

So i think we have positive duration when entering this swap

#9

So, if we’re long high duration and short low duration, the net is . . . ?

#10

Yup.