An equivalent description of the holding of a receive-floating pay-fixed swap is as follows:
A)An exchange of a long position in a fixed-rate bond for a short position in a floating-rate note.
B)A portfolio of long positions in forward-rate agreements (FRAs)for each swap payment date,all at the same fixed rate as the swap.
C)A bond that pays the fixed rate minus the floating rate each period.
D)All of the above.

Question

Quizplus · Accepted Answer

(a)is the opposite of what is needed-it should be a short position in a fixed-rate bond and a long position in a floating-rate note.(c)is almost correct except that the bond would have a net long principal position that does not occur in a swap.(b)is valid,as the FRA portfolio has exactly the same cash flows as the swap.

An Equivalent Description of the Holding of a Receive-Floating Pay-Fixed