Montero CFAI mock exam version c- Swaps

CFA Level III Derivatives
#1

Why is this statement wrong- "By entering into an interest rate swap in which we recieve a floating rate in return for paying a fixed rate of interest, we can hedge against rising interest rates and thus stabilize viewmont’s cash outflows. The swap will also reduce the sensitivity of viewmont’s overall poistion to changes in the interest rates"

I don’t understand the italicized part. My understanding is that when you are paying fixed, your duration of the swap increases and hence overall sensitivity of portfolio to the interest rate increases too.

But the answer says that the sensitivity decreases. How should it decrease?

#2

Receiving floating, Paying fix = Payer swap

The Duration of the payer swap equals Dur(float) less Dur(fixed) and is usually negative. As you add that swap, you DECREASE your overall duration.

#3

to decrease duration = you pay … to remember this … draw an arrow pointing down and looks like a p …

to increase duration = you ge"t" … to is aiming upwards, so you receive fix and pay float.

#4

Also note that by entering it such swap you would increase your cash flow risk (unknown future payments) and reduce your market value risk (because of lower duration of overall position).

#5

I understood. Thanks all for the explanation.