For example, assume bank A and bank B enter into an interest rate swap. The modified duration of the receiving leg of a swap is calculated as nine years and the modified duration of the paying leg is calculated as five years. The resulting modified duration of the interest rate swap is four years (9 years – 5 years). The duration of an interest rate swap is simply the duration of the asset less the duration of the liability. This metric is simply based on the notion of modified duration, converting the percentage change implied therein to a change value that is measured in actual dollars. The objective is to satisfy the regulatory mandate of reducing the dollar duration gap to no more than 50bps of the asset size by using a plain-vanilla interest rate swap An interest rate swap can either be fixed for floating (the most common), or floating for floating (often referred to as a basis swap). In brief, an interest rate swap is priced by first present valuing each leg of the swap (using the appropriate interest rate curve) and then aggregating the two results. The two companies enter into two-year interest rate swap contract with the specified nominal value of $100,000. Company A offers Company B a fixed rate of 5% in exchange for receiving a floating rate of the LIBOR rate plus 1%. The current LIBOR rate at the beginning of the interest rate swap agreement is 4%. This metric is simply based on the notion of modified duration, converting the percentage change implied therein to a change value that is measured in actual dollars. The objective is to satisfy the regulatory mandate of reducing the dollar duration gap to no more than 50bps of the asset size by using a plain-vanilla interest rate swap

## The two companies enter into two-year interest rate swap contract with the specified nominal value of $100,000. Company A offers Company B a fixed rate of 5% in exchange for receiving a floating rate of the LIBOR rate plus 1%. The current LIBOR rate at the beginning of the interest rate swap agreement is 4%.

An interest rate swap can either be fixed for floating (the most common), or floating for floating (often referred to as a basis swap). In brief, an interest rate swap is priced by first present valuing each leg of the swap (using the appropriate interest rate curve) and then aggregating the two results. The two companies enter into two-year interest rate swap contract with the specified nominal value of $100,000. Company A offers Company B a fixed rate of 5% in exchange for receiving a floating rate of the LIBOR rate plus 1%. The current LIBOR rate at the beginning of the interest rate swap agreement is 4%. This metric is simply based on the notion of modified duration, converting the percentage change implied therein to a change value that is measured in actual dollars. The objective is to satisfy the regulatory mandate of reducing the dollar duration gap to no more than 50bps of the asset size by using a plain-vanilla interest rate swap For example, assume bank A and bank B enter into an interest rate swap. The modified duration of the receiving leg of a swap is calculated as nine years and the modified duration of the paying leg is calculated as five years. The resulting modified duration of the interest rate swap is four years (9 years – 5 years). An interest rate swap is an agreement between two parties to exchange one stream of interest payments for another, over a set period of time. Swaps are derivative contracts and trade over-the-counter. The most commonly traded and most liquid interest rate swaps are known as “vanilla” swaps, For a spot starting interest rate swap, the duration is calculated as the duration of the fixed rate leg less the duration of the floating leg. Each of these calculations is akin to calculating the duration of a fixed (or floating) rate bond.

### INTEREST RATE SWAPS Definition: Transfer of interest rate streams without transferring underlying debt. 3 FIXED FOR FLOATING SWAP MANAGING DURATION Why use swaps to manage Duration Risk? 1. Many institutions such as federal agencies are rate interest, while the Aaa corporation raises funds in a fixed-rate

Dollar Duration of a Swap. The dollar duration of an interest rate swap is the difference between the dollar duration of the two bond positions (the fixed rate bond and the floating rate bond) that assumingly make up the swap. More specifically, the dollar duration of a swap for a fixed rate payer is Several risk statistics are calculated for interest rate swaps including modified duration, convexity, and basis point value. These risk statistics are based on the risk statistics for the individual legs of the swap, as described below. For example, assume bank A and bank B enter into an interest rate swap. The modified duration of the receiving leg of a swap is calculated as nine years and the modified duration of the paying leg is calculated as five years. The resulting modified duration of the interest rate swap is four years (9 years – 5 years). The duration of an interest rate swap is simply the duration of the asset less the duration of the liability.