Application of Derivatives - Lehigh

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sunman9

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Application of Derivatives - Lehigh
Based on the data in Exhibit 2, modifying the duration of the fixed-income allocation to its target will require an interest rate swap that has notional principal closest to:
Target is 3. Current Duration is 5. Bond Portflio is 10mill. Cacluate NP. Assuming rates rise.
Swap A - maturity of 2 yrs. D = -2.125
Swap B - maturity of 3 yrs. D= -3.375
Swap C - maturity of 4 yrs. D = -3.625
My question is how do we know which swap to pick? Answer selects Swap C without any justification. What did I miss?
 
Always choose the swap with the highest net duration; it’ll give you the lowest notional principal.
 
a swap with the lowest duration (in this case the most negative) will require the lowest notional principal, hence it is the cheapest
 
I couldnt figure the rationale out either but you could also just solve for NP on each, the only one that showed up as an answer choice was the correct one.
 
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