# Equity Swap Quickie!

Transaction 3: Equity swap to gain exposure to the Russell 2000 index. Springtree enters into a two-year equity swap in which it will receive the rate of return on the Russell 2000 Index and will pay a fixed interest rate equal to 4.99 percent. The swap has annual payments. The Russell 2000 Index is at 757.09 at the beginning of the swap and the notional principal of the swap is \$100 million. Monk considers a scenario in which the Russell 2000 Index falls to 723.86 in 100 days and the term structure of interest rates is as presented in Exhibit 4. Day 260 Rate| 0.0442| Present Value Discount Factor| 0.9691 Day 620 Rate| 0.0499| Present Value Discount Factor| 0.9209 Note: Calculations are on a 360-day basis. T = Time to expiration; Can someone help and explain how this can be solved. I can’t seem to get the right answer…

4.99% on a yearly basis of \$100 Million Notional is 49,900 fixed payment that you owe on the 260th day and the 620th day… discount these 2 payments, by the PV Factors to determine the PV of what you owe 0.0499 * (0.9691) + (1.0499) * (0.9209) = 0.048358 + 0.966853 = 1.015 This is the Value per Notional Dollar that you owe For the Equity piece, as of today you will receive 723.86/ 757.09 = 0.956108 You then calculate the value of the Swap 100,000,000 * (0.956108 - 1.015) = -588,917 is that right?

The answer is =((723.86/757.09)-0.9209-0.0499*(0.9691+0.9209))*100,000,000= -\$5,910,000 They explained it poorly but this is the equation/way they do it in the CFAI text.

What is the interest you will pay each year? 100,000,000 x 0.0499 = 4,990,000 So your cash flow for fixed structure will be: End of year 1: 4,990,000 End of year 2: 104,990,000 So discount them to present: 4,990,000 x 0.9691 = 4,835,809 104,990,000 x 0.9209 = 96,685,291 Add them up and you will get: 101,521,100 Now the equity return is 723.86/757.09 x 100,000,000 = 95,610,825 So you are receiving equity return and paying fixed: 95,610,825 - 101,521,100 = -\$5,910,274.33 So your value of your swap is -\$5,910,274.33 (approx)

okay you make it look so easy. that’s the way I did it too but i guess i’m just retarded when it comes to swap. I thought when the index went down it would be negative I don’t know what iw as thinking thank you ver much!

=(P1/P0) - Last PVIF - fixed(sum of PVIF) at this point for swaps im just trying to memorize formulas

vinniepaz730 Wrote: ------------------------------------------------------- > okay you make it look so easy. that’s the way I > did it too but i guess i’m just retarded when it > comes to swap. > > I thought when the index went down it would be > negative I don’t know what iw as thinking > > thank you ver much! You were sort of correct in your thinking. It is a negative return when you invest in equity. You put in 100 million and got 95.6 million back. So you lost 4.3million (a return of -4.3%). But you cant get a negative amount back. That is not possible. You just lost money from your investment. And that cost you, your total swap value is down by 5.9 million. Just try to do one more EOC or example equity question and see if you can crack it. Best of luck.

just had a few decimal places wrong in my explanation… my bad

Equity swap to gain exposure to the Russell 2000 index. Springtree enters into a two-year equity swap in which it will receive the rate of return on the Russell 2000 Index and will pay a fixed interest rate equal to 4.99 percent. The swap has annual payments. The Russell 2000 Index is at 757.09 at the beginning of the swap and the notional principal of the swap is 100 million. Monk considers a scenario in which the Russell 2000 Index falls to 723.86 in 100 days and the term structure of interest rates is as presented in Exhibit 4. Day 260 Rate| 0.0442| Present Value Discount Factor| 0.9691 Day 620 Rate| 0.0499| Present Value Discount Factor| 0.9209 Note: Calculations are on a 360-day basis. T = Time to expiration; Return on equity side of swap = 723.86/757.09 = 0.956108 Return on the fixed interest rate swap: Per period pay 0.0499 -- annual payment. So Fixed side of swap = (0.0499)\*(0.9691+0.9209)+0.9209 = 1.015211 Swap is receive equity, pay fixed so +0.956108-1.015211 = -0.059103 per of notional Notional = 100 Million So payoff = -5,910,300\$