# Equity swap

An asset manager wants to temporarily increase his exposure to mid-cap stocks and away from large-cap stocks. He enters a one year \$100m notional principal equity swap agreeing to pay the swap dealer the returns on the large-cap index and receive the returns on the mid-cap index. When the swap was initiated the large-cap index was 6320 and the mid-cap index 3140. At expiry the large-cap index was 6420 and the mid-cap index 3340. Identify the cash flow for the asset manager at expire: A) A receipt of \$2,393,574 B) A payment of \$2,393,574 C) A receipt of \$4,787,149 D) A payment of \$4,787,149

D

C

I believe it’s C. He is increasing exposure to mid-cap… so he is receiving mid-cap payments and paying the large cap. The large cap increases by a small amount than the mid cap, so he will receive funds. Tricky thing to keep eyes open for with equity is when you ‘pay negative’ or ‘receive negative’… that is, when a stock position takes a loss.

y not C as the % of mid-cap index went up more than the large-cap?

He enters a one year \$100m notional principal equity swap agreeing to pay the swap dealer the returns on the large-cap index and receive the returns on the mid-cap index. When the swap was initiated the large-cap index was 6320 and the mid-cap index 3140. At expiry the large-cap index was 6420 and the mid-cap index 3340 pay: [(6420-6320)/6320] x 100m=1582279 receive: [(3340-3140)/3140] x 100m=6369427 Net: Received-paid= 4787149

C misread the Q, thought he was paying the mid-cap

Maybe if I wasn’t an idiot and thought the lg cap returned 15.82%, i would have had this right a long time ago.

hah, I can’t beleive it, I got it right! C he gets the small cap \$100 * 6.37% and pays out (\$100M * 1.58%) the net is 6.37 - 1.58 = 4.79 since small cap did better than large cap, the guy gets \$4.79 IN to him he wins