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This is an easy question, I hope.

Suppose we have a swap A with a long position, which, originally, has a weight of 30%. Over time, it has a positive performance of 3%, meaning we have a multiplier of 1.03 relative to its original value. Hence the resulting weight would be 30% * 1.03 = 30.9% (as a % over original portfolio value). This makes sense, because you expect the value of the holding in A to increase as its performance increases, hence so will the weight.

If we now have a swap B with a short position with an original weight of -20%, and the swap performance is -2% (0.98 relative to original value), we would expect the portfolio to perform better as you benefit from the drop in value of the swap.

How would I work out the resulting weight as % of the portfolio's original value? Is it simply a case of -20/0.98 = -20.4%? A mathematical explanation would be appreciated.

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  • $\begingroup$ 30% * 1.03 = 30.9%, not 39% $\endgroup$
    – amdopt
    Jun 7, 2020 at 16:07
  • $\begingroup$ @amdopt Thanks - edited (accidental slip!) $\endgroup$
    – junior_pm
    Jun 7, 2020 at 16:15
  • $\begingroup$ Isn't the new weight -20*0.98 = -19.6? You have profited from the bad performance (positive P&L) but you now have a smaller short position as the result of that performance. (But I am not an expert on swaps). $\endgroup$
    – nbbo2
    Jun 7, 2020 at 16:40
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    $\begingroup$ I've been told that it's not -19.6% unfortunately...? $\endgroup$
    – junior_pm
    Jun 7, 2020 at 17:15
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    $\begingroup$ Not really I’m afraid. Do you know the correct answer? I think someone should be able to reverse it. $\endgroup$
    – Bob Jansen
    Jun 8, 2020 at 20:11

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