Understanding Negative Duration Positions:

Option C (Correct): An interest rate swap where you pay fixed and receive floating (LIBOR + spread) has negative duration because:

• When interest rates rise, the floating payments you receive increase in value
• When interest rates fall, the floating payments you receive decrease in value
• This creates an inverse relationship between the swap's value and interest rates

Why other options are incorrect:

Option A: Callable bonds have positive duration (though lower than option-free bonds) - their value decreases when rates rise.

Option B: Putable bonds have positive duration (though lower than option-free bonds) - their value decreases when rates rise.

Option D: An interest rate swap paying floating and receiving fixed has positive duration - its value decreases when rates rise.

Key Concept: Negative duration instruments gain value when interest rates rise, providing a hedge against rising rate environments.