MDURswap

[Que Sera]

Can someone clarify kindly which duration figure to use when we are working out the notional p?
usually they give a table of available swaps and I always get confused as to which one to pick. Initially I thought it had to be the one that matched the maturity of the underlying, but that didn’t work on another wuestion
any help much appreciated..

 

[Doppleganger]

I believe you want to use the duration that minimizes the notional. I remember reading that somewhere, hopefully someone else can clarify as well.

 

[pokhim]

yep.. choose the highest duration asset as it gives the lowest NP.

 

[Cubemonkey]

pokhim wrote:
yep.. choose the highest duration asset as it gives the lowest NP.

As an addendum to this correct statement.
Duration of fixed portion of swap = 0.75 x maturity
Duration of floating portion of swap = 0.5 x period length (e.g. for a semi-annual, duration is 0.5/2 = 0.25)
So it follows that to reduce NP you’d want the longest maturity swap available with the most compounding periods.

 

[Que Sera]

awesome, thanks guys that makes sense