I’m struggling to get my head around this:
If you manage a defined benefit pension plan and you expect interest rates to increase and hence the PBO to also decrease, why would you enter into a pay floating receive fixed swap to increase portfolio duration. Surely if rates are increasing you want to receive floating to earn higher returns?
Given only those facts, it sounds pretty stupid.
However, you may have a mandate that the money duration of the plan assets has to equal (or, at least, be pretty darned close to) the money duration of the liabilities.
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Thank you for taking the time to respond - it is really much appreciated. If you want I can send you the complete question…I just cannot get my head around why you would not go receive floating if rates are expected to rise.
Please do.
Dear Mr Magician, you really have built up a reputation of being the CFA guru… almost like the stig from this British show called Top Gear when it was still good. In that show the mythical stig always disguised as a racing driver helmet and all reveals himself on a very special episode to be the one and only Michael Schumacher. Which brings me to you, perhaps you are the mythical Warren Buffett? Anyway, I have just finished level 3 and feel very uncertain on the AM section but quite confident on the PM section. I’m just wondering if this is normal or whether this is a bad sign. Thank you for all you do to help candidates as you are almost like the Google of finance when candidates have a problem.
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You’re very kind.
I’m quite familiar with Top Gear, the Stig, and Schumacher. And, no. I’m not Buffett.
Your feelings are normal.
Fingers crossed for you!
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