## INTEREST RATE SWAP Case Solution

**Â Are the return and volatility patters consistent with your expectations?Â **

The standard deviation tells how the returns are deviating from the expected normal returns which are mentioned above the standard deviation is greater than the standard deviation which represents greater degree of risk and return because standard deviation over average return percentage indicates upside or downside variation.

average returns |
0.21% |
0.26% |
0.32% |
0.37% |
0.41% |
0.48% |
0.57% |
0.85% |

standard deviation |
0.26% | 0.44% | 0.65% | 0.87% | 1.08% | 1.45% | 1.92% | 3.69% |

As it can be seen in above table where the highest standard deviation is 1.92% over 0.57% return on the 30 year interest rate swap which is very high and show significant volatility it also reflects that return can be greater as 3.69% % or it can fall by 3.69%. The standard deviation in other rates showing normal deviation and one should expect this type of volatility but 3.69%% is very high if we consider swap return of every year. This is also because the longer term to maturity also reflects higher volatility because of time involved.

**Compute the average return for multiple bullet and barbell portfolios.**

On the basis of average returns the barbell return portfolio performed better than the butterfly barbell portfolio the average returns are as follows. The volatility of future returns can change the current shape of average returns.

Barbell return |
butterfly barbell return |
||||||

average returns |
0.28% | 0.35% | 0.48% | 0.00% | Â Â 0.02% | 0.03% | |

**Correlation table is given below.Â Â Â Â **

Â |
Barbell Return |
Â |
Â |
Butterfly Bullet-Barbell |
Â |
Â |

Barbell Return |
1 | |||||

Â |
0.953784 | 1 | ||||

Â |
0.908981 | 0.985563575 | 1 | |||

Butterfly Bullet-Barbell |
-0.04843 |
-0.286982814 | -0.326335177 | 1 | ||

Â |
0.389096 | 0.138122595 | 0.064577988 | 0.63506524 | 1 | |

Â |
0.532007 | 0.570418877 | 0.473766354 | 0.390570406 | 0.16480362 | 1 |

……………….

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