Swap: long and short positions

CFA Level III Derivatives
#1

I am sorry if this is a stupid question. I just want to make sure I get it…

So, I found somewhat contradicting views on this forum:
“Pay Fixed = Long Receive Fixed = Short”
“If you are paying fixed you are long the interest rate, however you are short the bond that you are hedging”"
“in swaps in which one party receives a floating rate and the other receives a fixed rate, the former is usually said to be long and the latter is said to be short”

My question is: are the long/short positions for Party 1 and 2 below correct?

  • Party 1: Receive fixed/pay floating (long fixed, short floating)
  • Party 2: pay fixed/receive floating (short fixed, long floating)

Thanks!

#2

Your terms are equally confusing. But I shall make an attempt ( however lame)

Usually the fixed rate is also known as the swap rate.
The one who is paying the fixed rate is now long the floating interest rate ( and necessarily short the bond that is being hedged)

The one receiving the fixed rate is short the floating interest rate.

But obvious the perspective of the parties are opposite and complete

#3

Commonly in derivatives, the long position is the one that gains when the value of the underlying increases and loses when the value of the underlying decreases.

In a plain vanilla interest rate swap (PVIRS), the underlying is the floating rate (it’s the only thing whose value can change). So, following convention, the long position in a PVIRS pays the fixed rate and receives the floating rate, while the short position pays the floating rate and receives the fixed rate.

In a fixed-rate equity swap, the long position would pay the fixed rate and receive the equity return.

There several swaps that, according to this convention, would not have a long position or a short position:

  • a floating-rate equity swap
  • an equity-for-equity swap
  • a fixed-for-fixed currency swap
  • a floating-for-floating currency swap
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#4

Great way to think about it

“In a plain vanilla interest rate swap (PVIRS), the underlying is the floating rate (it’s the only thing whose value can change). So, following convention, the long position in a PVIRS pays the fixed rate and receives the floating rate, while the short position pays the floating rate and receives the fixed rate.”

#5

Glad to be of help.

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