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?
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?