Justify why using interest rate swaps is an effective way to control risk and improve return for a fixed income portfolio.

Interest rate Swaps allow you to effectively manage your exposure to fluctuations in interest rates. These derivatives are used to change one interest rate type (e.g. These derivatives can be used to convert one type of interest rate (e.g. To protect from loss due to fluctuations in market rates, it is possible to convert floating rate bonds into fixed-rate bonds (e.g.

By using these instruments, you can take advantage of the opportunities that may be created by fluctuations on different markets. They also allow investors to adjust their positions without needing to make additional investments or sell current ones. Swaps can also generate extra income, as most agreements involve payments made based on a spread agreed between the two parties. Profits are then reinvested into a portfolio to increase diversification and growth.

In general, interest rate swaps can be a valuable tool in reducing risk and increasing returns. It allows for greater control over portfolios as well as access to additional income streams that may help improve performance on a long-term basis.