Hood believes that bond yields will begin an upward trend and wants to adjust the duration of the balanced fund’s fixed income portfolio for the next two years. Bullseye’s head trader informs Hood that he can implement this duration adjustment using a pay-fixed, receive-floating interest rate swap.
Hood considers the selected swap contracts shown in Exhibit 2. He knows that he can obtain the required interest rate exposure using any one of these contracts, but his objective is to minimize the notional principal of the swap.
Exhibit 2 Selected Pay-Fixed, Receive-Floating Swap Contracts
