CFA CFA Level 3 Long and short interest rate swap explained


Long and short interest rate swap explained

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      If “John is long a interest rate swap”, what does that mean? Which position is he taking?

      Also, is there a long-short position for FX swaps? Intuitively for me there shouldn’t be, but I’m just paranoid I’m going to see a question like “John is long a USD:EUR swap” and not know what the positioning is.

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      Hi @artyeasel, in a plain vanilla or generic interest rate swap, an exchange of fixed and floating payments occur between 2 parties.

      So there is a long-short position for interest rate swaps:

      • Fixed-rate payer (or floating-rate receiver) is often referred to as having bought the swap or having a long position.
      • Floating-rate payer (or fixed-rate receiver) is referred to as having sold the swap and being short.

      An FX (currency) swap, unlike interest rate swaps, usually involves the exchange of principal and interest in one currency for the same in another currency. There is a long and short position in FX swaps too.

      So if for example John was receiving USD and paying out EUR cashflows, John is long USD and short EUR.

    • Up

      Brilliant – thanks @sophie! Let me see if I got it right:

      For interest rate:
      Paying Fixed = Long
      Paying Float = Short

      For FX:
      Long = receive
      Short = pay


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      Yup @artyeasel! Spot on.

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