An equivalent description of the holding of a receive-floating pay-fixed swap is as follows:
A) An exchange of a long position in a fixed-rate bond for a short position in a floating-rate note.
B) A portfolio of long positions in forward-rate agreements (FRAs) for each swap payment date, all at the same fixed rate as the swap.
C) A bond that pays the fixed rate minus the floating rate each period.
D) All of the above.

Question

Quizplus · Accepted Answer

A receive-floating pay-fixed swap essentially is a combination of a series of forward-rate agreements. The holder receives a floating rate and pays a fixed rate, which can be replicated through a series of forward-rate agreements with the same fixed rate as the swap. Therefore, choice B is the best description of the holding of a receive-floating pay-fixed swap. Choices A and C describe individual components of the swap but do not fully capture its nature. Choice D is incorrect since it includes choice C as an equivalent description, which is not entirely accurate.

An Equivalent Description of the Holding of a Receive-Floating Pay-Fixed