Nominal Value of a Swap

CFA Level III Derivatives
#1

When finding the Notional Principal of a swap to modify duration of the fixed-income allocation we are normally given 2 or 3 different swap maturities and durations.

Which one are we supposed to pick up and for what reason? I’ve just done the following question in CFAI on-line topics:

20 million $ portfolio, duration is 5, and desired allocation is 3

Swaps:

#1 Maturity of 2 years, duration -2.125

#2 Maturity of 3 years, duration -3.375

#3 Maturity of 3.5 years, duration -3.625

To find NP I did (3-5)/-3.375 because -3.375 but right answer is -3.625 (duration of #3)

Thanks!

#2

higher the duration of the swap selected – your notional principal would be lower.

also think of having to spend that amount of money every so often …

#3

Always choose the swap with the highest duration; as cpk says, the notional amount will be the lowest, so the payments will be the lowest.

#4

Good to know. Thanks both!

#5

My pleasure.