Financial Derivatives - Increasing Portfolio Yield
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Imagine you are a money manager hoping to accumulate portfolio yield. Since you anticipate that the current short-term interest rates will increase more than the current yield curve, explain whether you would you rather pay a determined long-term rate and have a floating short-term rate or vice-versa.
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Solution Summary
The portfolio yield for financial derivatives are examined. The long-term rates for floating short-term rates or vice versa are given. Expectations are given.
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If a money manager is expecting the current short-term interest rates to increase more than the current yield curve, than he would pay a fixed long-term interest rate and receive floating short term rate. This would ensure that he is making money as he could use the funds he borrowed long-term to invest in short term assets. As long as his expectations are correct, he will be fine.
However, it is important to note that the yield curve reflects market expectations. The shape of the yield curve indicates the cumulative priorities of all lenders ...
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