I think my mistake was to discount the return on the equity side back to present. This will be paid in 260 days,correct? So why do we not have to discount it back?
McLeod - Your answer is perfect BUT my question is why don’t we discount the floating rate pmts back 260 days? Shouldn’t the floating rate be {1+ [(723.46/757.09) - 1]} * Z260 day factor of .9691 Please clarify?
McLeod81 Wrote: ------------------------------------------------------- > You have to add 1 to each side to represent the > return of principal, since we are working on a per > notional principle basis. \> \> [[1+(-0.04389)] - (0.0499 \*0.9691) - \> (1.0499\*0.9209) ] \* 100,000,000 \> \> The first part is the return of principal + the \> negative equity return \> \> The second part is the first annual coupon (per > notional principal) > > The third part is the return of principal + the > second annual coupon > > Multiply the differential per dollar notional > principal (-0.059101) by the notional principal to > get -$5.9 million In this example, I was just showing anvx the logic behind the swap-solving process. You should calculate the value like this: (723.86 / 757.09) - (0.0499 *0.9691) - (1.0499*0.9209) ] * 100,000,000 = - $5,910,274 The “(723.86 / 757.09)” part represents the return on the equity portion of this swap over the first 100 days. This is the value which the pay fixed party is to receive (or pay since the return is negative). It isn’t discounted because it is already set at the current value. Edit: Note that it’s an pay fixed receive equity swap, and not a plain vanilla.
how are you getting the Z of .9691? I’m taking 1 /( 4.99% (260/360) + 1) and getting .9652.
The 260 day LIBOR rate is 0.0442 260 day LIBOR: 0.0442 620 day LIBOR: 0.0499 Fixed Rate on SWAP: 0.0499
thanks.