Why receiver-fixed swap is used in static upward-sloping yield

CFA Level III Fixed Income
#1

Hi everyone,
Could someone share why receive-fixed swap is used in static upward-sloping yield rather than pay-fixed swap?
From the formula, the fixed rate has to be larger than the floating rate for investors to profit in this scenario.
But I’m confused about why the fixed rate would be larger than the floating rate in this scenario.
Thanks for helping!

#2

Did you study Level II?

If so, do you recall how the fixed rate on a swap is calculated?

#3

Thanks for reminding me of the basic concept!!

I looked through CFA level II derivatives part again and now I get that the fixed rate (swap fixed rate) is calculated based on the expected yield curve on different maturities. And the floating rate is based on “current” MRR rates.
So when time passes, on an upward-sloping yield, the discount factors would become smaller, making the SFR larger.
But how about the floating rate? Does it increase with the current MRR rate as well?

1 Like
#4

If the yield curve is static, the floating rate won’t change. Static’s . . . um . . . static.

#5

Thanks for your reply :slight_smile:

#6

My pleasure.