A manager of a $40 million dollar fixed-income portfolio with a duration of 4 wa

Question

A manager of a $40 million dollar fixed-income portfolio with a duration of 4 wants to increase the duration to 7. The manager chooses a swap with a semiannual reset period on the floating leg and a duration of 5 on the fixed leg. The manager should become a:

pay-floating counterparty in the swap with a notional principal of $26,666,667.

receive-floating counterparty in the swap with a notional principal of $26,666,667.

pay-floating counterparty in the swap with a notional principal of $ $25,263,158.

receive-floating counterparty in the swap with a notional principal of $15,238,095

pay-floating counterparty in the swap with a notional principal of $26,666,667.

receive-floating counterparty in the swap with a notional principal of $26,666,667.

pay-floating counterparty in the swap with a notional principal of $ $25,263,158.

receive-floating counterparty in the swap with a notional principal of $15,238,095

Explanation / Answer

Option A

As the semiannual resetting period, net swap duration=5-0.5=4.5

As he wants to increase duration, he should pay-floating and receive-fixed counterparty with notional principal=

40 million*(7-4)/4.5=26.67 million

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