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Liquid interest rate swap market

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Reference no: EM133071428

Situation: A risk manager at a large macro hedge fund is worried about various risk exposures at the Fund. The risk manager will use the interest rate swap market (IRS) to hedge or transform certain risks. 

Market:   An active, highly liquid interest rate swap market exists and is easily accessible.

  1. The hedge fund owns an extensive floating-rate notes (FRNs) portfolio, and the risk manager is concerned with falling interest rates. Suggest a specific trade1  using IRS to hedge the FRN portfolio against falling rates.
  2. The hedge fund acquires leverage in the interbank market and borrows money at 6-month Libor +30bp. The fund has a large portfolio of mortgage back securities (MBS) that earns 1-month Libor +80bp. As a result, the Fund has 1-month vs 6-month Libor exposure. Suggest a specific1 IRS trade to reduce this risk.
  3. Calculate the fixed rate on a 5-year IRS given the zero rates observed below.

Tenor -Years

Zero rate

1

.01750

2

.02250

3

.02625

4

.03125

5

.03375

Reference no: EM133071428

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