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LOS d: Determine the notional principal value needed on an interest rate swap to achieve a desired level of duration in a fixed income portfolio. ffice ffice" />
Q1. A manager of a $40 million dollar fixed-income portfolio with a duration of 4.2 wants to lower the duration to 3. The manager chooses a swap with a net duration of 2.1. What notional principal (NP) should the manager choose for the swap to achieve the target duration?
A) $22,857,143.
B) $56,000,000.
C) $70,000,000.
Correct answer is A)
NP = $40,000,000 × (3 ? 4.2) / -2.1
NP = $22,857,143
Since the manager wants to reduce the duration of his portfolio, he should take a receive-floating/pay-fixed position in the swap with that notional principal. Remember that a receive-floating swap has a negative duration, so we enter –ffice:smarttags" />2.1 in the equation.
Q2. If a fixed-income portfolio manager wants to double the duration of a portfolio with a swap that has the same duration as the portfolio, then the notional principal would be:
A) half the value of the portfolio.
B) equal to the value of the portfolio.
C) twice the value of the portfolio.
Correct answer is B)
If we let V and D equal the current value and duration of the portfolio respectively, then we see that:
NP = V × (2 × D ? D) / D = V
Q3. A manager of a $2 million dollar fixed-income portfolio with a duration of 3 wants to increase the duration to 4. The manager chooses a swap with a net duration of 2. The manager should become a:
A) pay-floating counterparty in the swap with a notional principal of $2 million.
B) receive-floating counterparty in the swap with a notional principal of $1 million.
C) pay-floating counterparty in the swap with a notional principal of $1 million.
Correct answer is C)
To increase duration, the manager should be a pay-floating/receive-fixed counterparty in the swap with a notional principal equal to:
NP = $2,000,000 × (4 ? 3) / 2
NP = $1,000,000.
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发表于 2009-4-10 11:09
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