14. Duration Swaps

Interest Rate Immunization with Swaps

Interest rate immunization with swaps manages the duration of ongoing business operations, exemplified by FSF, a financial services firm. Analyzing interest rate risk entails computing the duration of balance sheet items such as cash, marketable securities, amortizing loans, and coupon bonds. Weighted durations for asset and liability portfolios reveal the overall interest rate risk exposure of the firm.

Hedging Strategies for Interest Rate Risk

Hedging asset and liability portfolios individually using duration analysis protects against unanticipated interest rate changes. Calculating the amount of hedging instruments needed ensures market value safeguarding against interest rate fluctuations. The duration approach formula determines the correct notional principal for swaps.

Duration Gap Hedging

Duration gap hedging manages interest rate risk by considering the difference in durations between a firm’s assets and liabilities. Calculating the duration gap summarizes the firm’s risk position. Aligning the duration gap with required levels mitigates interest rate risk. Integration of asset and liability portfolio risk management ensures an all-inclusive approach.

Setting Interest Rate Sensitivity with Swaps

Setting interest rate sensitivity with swaps adjusts the firm’s duration gap to required levels. Modifications align with risk management objectives, look at speculative positioning possibilities. Risks associated with using swaps for managing interest rate exposure emphasize cautious decision-making.

In summary, Frugal Finance’s online courses look into duration swaps, interest rate immunization with swaps, hedging asset and liability portfolios individually, duration gap hedging, and setting interest rate sensitivity with swaps. Using real-world examples and computations, students learn about managing interest rate risk effectively. The courses provide a structured approach to understanding and implementing various tactics for mitigating interest rate exposure in financial operations. Frugal Finance prepares students with the knowledge and skills needed to navigate the complexities of interest rate risk management in real-world scenarios.