# equity swap schweser question

I have reached my enemy and i’m not having a fun day so far. pg 301-302 schweser the example they use is a basic equity swap and they want the value to the fixed rate payer after 30 days. on 302 they value the fixed rate pay side by taking the notional \$10mm x the .993993 which was the present value calc’d back on pg 296. fine, so now go to pg 310 question # 10. it gives the discount factor but here to get the fixed rate side it uses not the \$5mm notional, but \$5,050,000. i can see where the 50k would be the quarterly payment, it’s a 4% paying bond that pays quarterly so 1% x 5mm is the 50k, but how come here they include that 50k where as back on pg 301-302 they don’t and only calc the \$10mm instead of 10,151,300? any help appreciated. i struggle to see the big picture in swaps sometimes.

hmm… Interesting question I think they should have taken 10,151,300 instead of the notional 10m in the sample problem. Like how it’s done in Q10 0---------90---------180---------270-----[300]---------------360 Fixed Side (Bank) pays = 4% Payments left = 5m (notional) + last Q4 coupon payment = 5m + (5m*0.04/4) = 5m + 50K = 5050K PVFactor = 0.9940 PV = AMT*PVFactor PV = 5050,000*0.9940 PV = 5019700 Value at Equity Side = 3150/3000 * 5m = 5.25m Value to bank = 5250000 - 5019700 = 230300

back to pg 296, i guess it’s b/c that .993993 is the present value of the future divs, not a discount factor. that picture makes it clearer and note on the 360 day one it includes the principal on the cash flow. where as the question 10 like your little pic shows, we have both the principal and that last div payment on day 360 and then have to discount it back. ok, i think i get the difference b/t those 2 now. i still suck at swaps though and think i’m going to do these concept checkers over again right now and then maybe do some q-bank on it tonight too.

oh and thx SG for the explanation and picture. i definitely have found that if i don’t draw a picture with swaps, i get all sorts of screwed up instead of just a little screwed up.

The way I did it: Index move: 996/985 = 1.01168 Pay fixed move: Days******Factor*****Amt*****Total 60******0.99010****0.01513***0.01498 150*****0.97363****0.01513***0.01473 240*****0.95541****0.01513***0.01456 330*****0.93567****1.01513***0.94983 Total====================>0.9941 So Pay fixed, Receive Index = -0.9941+1.01168 = 0.01758 per notional. We have 10 Million notional -\> so 175,800 (this is pretty close to the book answer of 171745\$ This is the way they have solved problems in the book as well… so this is something I have gotten comfortable with.

made a small calc mistake above on the equity receive side: 996/985 = 1.0111675 so total tran for 1\$ = -0.9941 + 1.0111675 = 0.0170675 so 170,675.13\$ for 10Million \$