Hi,
In the mock exam “Appliction of Derivatives, Lehigh” , one of the question is confusing for me.
The question is to calculate the notional amount required in an interest rate swap to adjust the duration of 5 to a target duration of 3.
What is confusing is that three different swaps (A,B,C) are proposed in the question, each of them with a different maturity and a different duration.
A: Maturiy 2 and duration -2.125
B: Maturity 3 and Duration -3.375
C: Maturity 3.5 and Duration -3.625
I understand the solution to calculate the required Notional principal :
NP=BondPortfolio*(Target Duration - Bond Duration)/ Swap Duration.
It appears that for only one of the three swaps proposed , the result of the calculation is in the three proposed answers, hence i selected this one.
My question is : Is there a logic to find out which one of the three swaps (A,B,C) should be used prior to any calculation in order to avoid doing the three calculations to find out which results can be found in the proposed answers?