Finance Junkie
Posts: 205
Joined: Mon Feb 04, 2013 3:35 pm


Postby » Tue Oct 08, 2013 2:25 am

Choose one
a. St1: Enter into a swap transaction in which the firm pays fixed and receives floating.
b. St2: Enter into a swap transaction in which the firm receives fixed and pays floating.
c. St3: Purchase an interest rate cap expiring in six months.
d. St4: Sell Eurodollar futures contracts.
A portfolio management firm manages the fixed-rate corporate bond portfolio owned by a defined-benefit
pension fund. The duration of the bond portfolio is 5 years; the duration of the pension fund’s liabilities is 7
years. Assume that the fund sponsor strongly believes that rates will decline over the next six months and is
concerned about the duration mismatch between portfolio assets and pension liabilities. Which of the following
strategies would be the best way to eliminate the duration mismatch?
Choose one answer.
The correct answer is St2.
The manager should increase the duration of assets, or buy coupon-paying bonds. This can be achieved by
entering a receive-fixed swap, so St2) is correct and St1) is wrong. Buying a cap will not provide protection if
rates drop. Selling Eurodollar futures will lose money if rates drop.

How come a firm receives fixed and pays floating will increace the duration?

Finance Junkie
Posts: 258
Joined: Thu Sep 20, 2012 3:42 pm


Postby pradeeppdy » Tue Oct 08, 2013 9:56 am

Pays floating will increase duration because it is not pre decided, But the fixed rate that you are getting is pre decided.
And here we need to adjust or increase our duration.

Return to “FRM Part I”


Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to and we will rectify it.