Help with Equity Swap Question

Below is the question. I have the answer, I follow what they do in the solution, but I don’t understand how they don’t account for the return on the equity portfolio.

Doesn’t the dividend yield make a difference in the pricing?

Thank you


Consider a fixed-rate semiannual-pay equity swap where the equity payments are the total return on a $1 million portfolio and the following information:

  • 180-day LIBOR is 4.2%
  • 360-day LIBOR is 4.5%
  • Div. yield on the portfolio = 1.2%

What is the fixed rate on the swap?



they only ask for the Fixed rate.
Thats from Libor, nothing to do with the div.

Yes to what FDLAVOIE said and also for the equity return, I believe dividend yield is not included. It’s the return from the capital appreciation. (smb correct me if I’m wrong)

Swaps are custom derivatives; as such, they can have whatever terms the parties negotiate.

For equity swaps in particular, the equity return can be only the dividend yield, only the capital appreciation, or the total return.

Thank you for all of the responses.