Situation A risk manager at a large macro hedge fund is worried about various risk exposures at the Fund The risk manager will use the interest rate swap market (IRS) to hedge or transform certain risks Market An active, highly liquid interest rate swap market exists and is easily accessible The hedge fund owns an extensive floating rate notes (FRNs) portfolio, and the risk manager is concerned with falling interest rates Suggest a specific trade 1 using IRS to hedge the FRN portfolio against falling rates The hedge fund acquires leverage in the interbank market and borrows money at 6 month Libor 30bp The fund has a large portfolio of mortgage back securities (MBS) that earns 1 month Libor 80bp As a result, the Fund has 1 month vs 6 month Libor exposure Suggest a specific 1 IRS trade to reduce this risk Calculate the fixed rate on a 5 year IRS given the zero rates observed below Tenor Years Zero rate 1 01750 2 02250 3 02625 4 03125 5 03375

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Question: Situation: A risk manager at a large macro hedge fund is worried about various risk exposures at the Fund. The risk manager will use the

Situation: A risk manager at a large macro hedge fund is worried about various risk exposures at the Fund. The risk manager will use the interest rate swap market (IRS) to hedge or transform certain risks.

Market: An active, highly liquid interest rate swap market exists and is easily accessible.

The hedge fund owns an extensive floating-rate notes (FRNs) portfolio, and the risk manager is concerned with falling interest rates. Suggest a specific trade¹ using IRS to hedge the FRN portfolio against falling rates.

The hedge fund acquires leverage in the interbank market and borrows money at 6-month Libor +30bp. The fund has a large portfolio of mortgage back securities (MBS) that earns 1-month Libor +80bp. As a result, the Fund has 1-month vs 6-month Libor exposure. Suggest a specific¹ IRS trade to reduce this risk.

Calculate the fixed rate on a 5-year IRS given the zero rates observed below.

Tenor -Years	Zero rate
1	.01750
2	.02250
3	.02625
4	.03125
5	.03375

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