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 Post subject: Volume of swapsPosted: Sat, 22 Oct 2011 01:34:21 UTC
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Joined: Thu, 18 Jun 2009 10:22:43 UTC
Posts: 44
Hi,
I’m a bit confused as to how the answer was worked out in the question below:

Consider the following balance sheet (in millions) for an FI:

Assets
Duration = 10 years \$950

Liabilities
Duration = 2 years \$860
Equity \$90

If the financial institution (FI) wanted to use 5-year (semi-annual) interest rate swaps, what volume of swaps would be required to immunise the balance sheet risk? What position in the swap would the FI be required to take (i.e. pay or receive fixed)?

Using the formula DGap * A = DSwap x VolSwap as the basis of setting the macrohedge:

VolSwap = DGap * A / DSwap
= 8.19*950,000,000/ (5-0.5)
= \$7,780,500,000/ (4.5)
= \$1,729,000,000

What I don’t understand is the Duration of the swap part.

Why do I take away 0.5 from 5? Is it because it’s a semi-annual swap and we have to take 6 months off the overall time of the swap? That’s where I’m a bit confused.

Any help would be appreciated.

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 Post subject: Re: Volume of swapsPosted: Sat, 22 Oct 2011 04:32:13 UTC
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