Inverse Floater Quiz net

DarienHacker

I want to issue an inverse floater. I know the components are 1) Short inverse floater and 2) Long coupon bond. What is the third component? What are the net cash flows?

Chuckrox

Receive fixed pay floating.

NakedPuts00

There are 4 components to this structure:

A long fixed coupon bond ( receiving x)

A short inverse floater (paying a - LIBOR)

A swap to pay LIBOR and receive the swap rate

A long interest rate cap on LIBOR to offset the implicit short call in the guarantee to pay a non-negative rate on the inverse floater in case LIBOR exceeds 'a'

Net cash flow = x - (a - LIBOR) - LIBOR + swap rate = x - a + swap rate

bodhisattva

soddy, thx again for posting this outlier

however, after I now had some time looking for leveraged/inverted floaters - i could not even find them in the schweser parts.

Further, in the LOS of SS 43 there is no direct hint to leverage / inverse floaters

So, anyone thinks this is a highly likely question?

lcw77

I know the shortcut calculation and what you need to implement the hedge. If they ask any more detail on this, I'll be more than happy to donate those points. Not worth the time at this stage.

NO EXCUSES

cityboy

malawyer100 Wrote:
-------------------------------------------------------
> soddy, thx again for posting this outlier
>
> however, after I now had some time looking for
> leveraged/inverted floaters - i could not even
> find them in the schweser parts.
>
> Further, in the LOS of SS 43 there is no direct
> hint to leverage / inverse floaters
>
> So, anyone thinks this is a highly likely
> question?

a search on 'leveraged floater' on the 5 schweser books draws a blank!! one more reason why you shouldn't have blind faith on schweser