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- 2011-7-2
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发表于 2011-7-11 19:34
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@ cpk123, value of floating rate bond does not fall when interest rate rises, it is the value of fixed rate bonds that fall. The reason will be clearer below.
I am a corporation that just issued a 10-year floating rate bond last year. My economists tell me that interest rate rates are going to rise in two years and will remain high for three years. I can decide to buy a payer swaption to convert my floating rate bond to fixed rate bond; the three year swaption will expire in two years.
If interest rates rise and my payer swaption is in the money, I will exercise it and pay fixed while receiving floating. The floating payment on the issued bond will be offset by the payment received from the swap I have entered.
Question is how does this contract affect cashflow (CF) and market value (MV) risk?
I have converted a floating rate bond to a fixed rate bond. I do not have CF risk because my payments are known for the next three years with certainty. But I am exposed to MV risk because the MV of my liabilities will fluctuate with interest rates. When rates rise, I am happy because I am locked into paying a lower coupon and MV of my liabilities will decline. This will lead to an increase in my shareholders' fund.
If the payer swaption expired out of the money, I will not exercise it. Since I am stuck with making floating payments, I cannot accurately predict what my next payment will be, hence I am now exposed to CF risk. Because the value of liabilities will adjust to par because of the fact that payments adjust to reflect current market rates, my liabilities will remain stable and I have little to zero MV risk. |
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