# fixed/floater - equity swap 88313 & 88292

Dumb question. How do you know how many fixed or floater periods of coupons to calculate if no time frame is given? 88313 calculates 2 periods but 88292 calculates 1 period only even though they are both semiannual. 88313 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) \$22,314. C) −\$22,564. -------------------------------------------------------------------------------- 88292 Consider a \$5 million semiannual-pay floating-rate equity swap initiated when the equity index is 760 and 180-day LIBOR is 3.7%. After 90 days the index is at 767, 90-day LIBOR is 3.4 and 270-day LIBOR is 3.7. What is the value of the swap to the floating-rate payer? A) −\$2,726. B) \$3,526. C) −\$3,526.

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88313: A http://www.wolframalpha.com/input/?i=-2000000*(982%2F985-1%2F(1%2B0.048*270%2F360)-0.044*180%2F360*(1%2F(1%2B0.046*90%2F360)%2B1%2F(1%2B0.048*270%2F360))) thinking about the 2nd one still …

Gotta be A and C

88292: C http://www.wolframalpha.com/input/?i=5000000*(767%2F760-((1%2B0.037*180%2F360))%2F((1%2B0.034*90%2F360)))

For the 2nd question, isn’t the floating payment calculated as the PV until the next reset date? Can someone confirm?

Could anyone explain B? I sort of understand what bobsters did but can’t get the reasoning behind it. Cheers.

bpdulog Wrote: ------------------------------------------------------- > For the 2nd question, isn’t the floating payment > calculated as the PV until the next reset date? > Can someone confirm? That’s not how it works for equity swaps from my understanding. You value the index on the given date and that’s the return you need to know. You don’t know what the return will be on the settlement (payment) date, so what will you find the PV of?

chad17 Wrote: ------------------------------------------------------- > bpdulog Wrote: > -------------------------------------------------- > ----- > > For the 2nd question, isn’t the floating > payment > > calculated as the PV until the next reset date? > > Can someone confirm? > > > That’s not how it works for equity swaps from my > understanding. You value the index on the given > date and that’s the return you need to know. You > don’t know what the return will be on the > settlement (payment) date, so what will you find > the PV of? 90 days till next reset date - 1.037/1.034(90/360) = 1.037x.9916 = 1.0283

Question A is a fixed for float swap. Question B is a float for equity swap (i.e. float for float) 767/760 - that’s what the equity receiver will receive. (equity receiver is floating rate payer) -(1+0.037*180/360)/(1+0.034*90/360) - that’s what the floating rate payer will pay (so I think he has to give a 180day 3.7% loan in 90 days, so we discount by the 90 day rate. note he has to give 3.7% in 90 days because the 180 day rate at the initiation of swap was 3.7% i.e. floating rate payment is decided on period before’s rates).

bpdulog Wrote: ------------------------------------------------------- > chad17 Wrote: > -------------------------------------------------- > ----- > > bpdulog Wrote: > > > -------------------------------------------------- > > > ----- > > > For the 2nd question, isn’t the floating > > payment > > > calculated as the PV until the next reset > date? > > > Can someone confirm? > > > > > > That’s not how it works for equity swaps from > my > > understanding. You value the index on the given > > date and that’s the return you need to know. > You > > don’t know what the return will be on the > > settlement (payment) date, so what will you > find > > the PV of? > > > 90 days till next reset date - 1.037/1.034(90/360) > = 1.037x.9916 = 1.0283 My bad, I thought you were referring to something else.

bobsters Wrote: ------------------------------------------------------- > Question A is a fixed for float swap. > > Question B is a float for equity swap (i.e. float > for float) > > 767/760 - that’s what the equity receiver will > receive. (equity receiver is floating rate payer) > > -(1+0.037*180/360)/(1+0.034*90/360) - that’s > what the floating rate payer will pay (so I think > he has to give a 180day 3.7% loan in 90 days, so > we discount by the 90 day rate. note he has to > give 3.7% in 90 days because the 180 day rate at > the initiation of swap was 3.7% i.e. floating rate > payment is decided on period before’s rates). Yeah makes sense man. Cheers bobs.

Ok, the first one. Step one - you are going to receive the value of the index 982/985 = .9970 or a loss of .003% Step two - lets value the original swap as a two coupon bond with principal at the end [.022 (half of the .044 rate) / 1 + ( .046 * .25)] + [1.022 / 1 + (.048 * .75)] = 1.0082 Now the value of the swap, you can already tell you are negative because you lost index and paid on the fixed rate. .9970 - 1.0082 = - .0112 * 2 million = approx a 22,500 loss. Will do the other one after the kids go to bed.

Damn, I just realised how simple that was. Good question.

sebrock Wrote: ------------------------------------------------------- > Will do the other one after the kids go to bed. Instead of a bedtime story, will the kids get a lesson in swap pricing? Pay 1.0185 / (1+0.034*90/360)

cpk123 Wrote: ------------------------------------------------------- > Pay 1.0185 / (1+0.034*90/360) floating payment is worth. > > Receive: 767/760 > > This is for 1\$. Ah, I think I got it now. So you divide LIBOR in half since it’s a semi annual swap?

As always CP is right on the floating. You take your original payment and convert it to a semi-annual bond so you get half of 3.7 plus your principal of one, present valued to today which is the 90 day rate when the coupon is going to be paid. Very simple it’s just the gain received on the index 767/760 and you pay floating for the first coupon which is 1.0185 PVd at 3.4% for 90 days. Once you go through this and think of them as individual bonds, it is very simple. Even the currency swaps.

sebrock Wrote: ------------------------------------------------------- > As always CP is right on the floating. You take > your original payment and convert it to a > semi-annual bond so you get half of 3.7 plus your > principal of one, present valued to today which is > the 90 day rate when the coupon is going to be > paid. > > Very simple it’s just the gain received on the > index 767/760 and you pay floating for the first > coupon which is 1.0185 PVd at 3.4% for 90 days. > > Once you go through this and think of them as > individual bonds, it is very simple. Even the > currency swaps. Thanks!

Quick question: how long is everyone taking to do questions like these? it is a bloody easy question if you look at it again, but on exam day, there’s a chance of f*cking up even the easiest questions.