Hedging and Relative Value Strategies · Swaps Trading Guide

A curve trade compares rates at different maturities. Its result depends on both legs, their sensitivities and the financing and collateral needed to hold them.

Define steepening precisely

For this lesson, steepening means the long maturity rate minus the short maturity rate increases. It can happen because long rates rise faster or short rates fall faster. A simple steepener can receive fixed at the shorter maturity and pay fixed at the longer maturity, with notionals sized to an explicit sensitivity target.

Match risk rather than notional

Longer maturity swaps often have greater rate sensitivity per unit of notional. Equal notionals can therefore leave a large directional exposure. A risk matched structure attempts to offset the two legs for a small parallel shift. The matching must be recalculated as curves and remaining maturities change.

Work through a first order move

Assume the short fixed receiver loses $1,000 per upward basis point and the long fixed payer gains $1,000 per upward basis point. If short rates rise 10 basis points and long rates rise 30, the estimated changes are negative $10,000 and positive $30,000. The combined estimate is positive $20,000 before costs and nonlinear effects.

Identify the failure cases

If the curve flattens, the same structure can lose. Even a correctly anticipated shape change may be offset by carry, execution costs or imperfect sensitivity matching. Large moves, basis changes and collateral calls require full scenario analysis. The position is a relative rate exposure, not a market neutral guarantee.

Try it yourself

Using the same $1,000 sensitivities, short rates rise 25 basis points and long rates rise 5. What is the estimated steepener result?

Show the worked answer

The short receiver loses $25,000 and the long payer gains $5,000. The net estimate is a $20,000 loss before costs and nonlinear effects.

Further reading

Educational material, not a recommendation to transact. Numerical examples are hypothetical and simplify contract terms. Access, documentation, collateral and regulatory requirements depend on the product, jurisdiction and counterparties.

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