Consider a semiannual equity swap based on an index at 985 and a fixed rate of 4.4%. 90 days after the initiation of the swap, the index is at 982 and London Interbank Offered Rate (LIBOR) is 4.6% for 90 days and 4.8% for 270 days. The value of the swap to the equity payer, based on a 2 million notional value is closest to: A) (22,564) B) $22,564 C) 22,314 D) (22,314) This one confused me so thought it was worth posting … Can someone explain how to ans? ANS: B $(22,564) is the value to the fixed-rate payer, thus $22,564 is the value to the equity return payer.
Swap is a zero sum game. One will gain what other lost in the transaction. Equity return payer will get the money if the index goes up. In this case index went down and hence he has to make payments.
I would think the equity return payer PAYS the equity returns so he receives when the index goes down. Therefore, I would say B or C but I can’t figure out the calc.
I am doing this way equity:982/985=0.997 fixed: 0.022/(1+0.046*90/360)+1.022/(1+0.048×270/360)=1.0082 so to equity payer is (-0.997+1.0082)*2million=$22400 but this is not in the answers. What I did wrong here?
Semi annual = 0.022 * 2,000,000 = 44,000 Fixed: 44,000/(1.046*90/360) + 2,044,000/(1.048×270/360) = 2,016,472.73 This is what the fixed pays Equity- 982/985 = .996954x2,000,000 = 1,993,908.63 2,016,472.73 - 1,993,908.63 = 22,564.1 Therefore ans is B …
Found in earlier posts …