Floating rate note question note, question, addition, position, become

liquidity

For an issuer of a floating-rate note, the market value of the loan will be:
A) volatile, but the position will become more stable with the addition of a receive-floating swap position.
B) relatively stable but the position will become less stable with the addition of a receive-floating swap position.
C) zero with the addition of a pay-floating swap position.

YouCanDoIt

I think I am messed up.

koba

The answer is B (duration of a floating-rate note is very small, market value is very stable). A and C increase duration because of the fixed leg.

Houjichasan

That seems right. The issuer has a floating rate liability (MV doesn’t change much), but the cash flow could. So they hedge by taken on a fixed rate liability (MV does change), but they rec the floating rate payments to satisfy the original FRN.

invic

Yep, the answer is B. I got confused by the issuer comment. I for some reason was thinking of issuing like a bank, but instead it meant issuing as a liability. Thus, they need the floating reception to even things out.

bchadwick

B- fixed payor has market risk, not cash flow risk.