This is problem 7 in the CFAI Text (reading 65). Sorry it is so long! Assume an asset manager enters into a one year equity swap in which he will receive the return on the NASDAQ 100 index in return for paying a floating interest rate. Swap calls for quarterly payments. The NASDAQ 100 is 1562.27 at the beginning of the swap. 90 days later thr rate L90(90) is .0432. Calculate the market value of the swap 100 days from the beginning of the swap if the NASDAQ 100 is at 1595.72 and term structure is L100(80) = .0427 L100(170) = .0481 L100(260) = .0544. Notional = 50 Million MV is calculated as : Present Value factor: 1 / [1 + (.0427 * 90 / 360)] = .9906 Floatng : [1 + (.0432 * 90/260)] * .9906 = 1.0013 Return on the Equity = 1595.72 / 1561.27 = 1.0221 MV = (1.0013 - 1.0221) * 50,000,000 = 1040,000 My question is: Why is the beginning value of the NASDAQ we use in the calculation of Return on the equity index the value on Day 0? Wouldnt we need the value on day 90 (since on day 100 we have already had a payment already)?
you are marking to market… it doesnt reset to par like a floating rate does