swap risk question

[kfcnhl]

On a plain vallia pay fixed rec float SOFR swap, the question is where the risk lies.
Floating leg or fixed leg?

My answer is the floating leg.
Hoping someone can confirm.

I have two thoughts on my answer assuming upward sloping SOFR discount curve:
1. In principle, when the SOFR curve reprices, the forward curve will change much more than the discount curve.
Let's say we have 1bps shock on the SOFR curve, the forward curve will need to move more.
forward curve 1Y move by 1bps is 2Y move by 2bps etc
This changes the cashflow on the floating side significantly.

2. Consider a realistic scenario of asset swap.
For example, buy 5Y UST and pay fixed swap.
The risk on the 5Y UST and the swap should be similar.
If curve move 1bps up parallel, the UST will suffer a 1bps loss.
On the swap fixed leg, there will be a tiny pnl due to the curve change on discounting the fixed coupons.
So the offsetting pnl doesn't come from the fixed leg, then it must come from the floating leg.

Not sure what's the standard convention but let's say the following.
Currency USD
Discount curve SOFR OIS
Forward curve: SOFR forward curve
Payment Freq: 6M Floating leg and fixed leg
Floating index: SOFR 180 day published by NY Fed
Term: 5Y

Happy if you could share any readings.

 

[worldlylife]

Yes, most of the risk is contributed by floating side (forward curve risk + Discount curve risk) and very little by fixed side (only discount curve risk).
However, we look at the risk from whole swap perspective, because if I am a fixed side payer, I still need to worry about floating side (because on fixing day if floating side's rate is less than initially agreed fixed rate then it mean I'm making a loss because I'm paying higher rate than the market expected rate for 6m term)

 

[kfcnhl]

Thanks for the confirmation!

However, if we include the notional payment at the end.
The fixed leg looks like a fixed coupon bond and the floating legs becomes a FRN.
Obviously, in this case, the fixed leg has a higher duration.
Which means the majority of the risk is on the fixed side.

How do we reconcile with the two approaches?
If I have a portfolio of swaps, how do I assess my risk?