If a fixed payment has greater duration than a float payment to REDUCE duration why do we enter a swap as a payer swap? I’m assuming it has a net negative duration while duration of asset decrease and duration of liability increases? The reverse is true for a receiver swap?
Payer Swap = pay fixed… So since fixed has longer duration than float, you reduce your duration. What you’re paying has higher duration than what you receive. The opposite for receiver swap.
If you gaze into depths of swaps, they also start gazing into you.
I never found swaps to be intuitive especially how to add/remove put/call options. Just remember to use Payer swap to calculate swap duration, plug it into duration adjustment formula, find notional principle and be done with it. Someone smarter than me will explain it to you but I wouldn’t worry too much about how they work.
the formula for the swap duration is Receive - Pay
So if you pay fix, the result will always be negative as pay fix leg has a longer duration