**Question ID#:** 95544

Consider a 1-year quarterly-pay $1,000,000 equity swap based on 90-day London Interbank Offered Rate (LIBOR) and an index return. Current LIBOR is 3.0% and the index is at 840. Below are the index level and LIBOR at each of the four settlement dates on the swap.

Q1: LIBOR: 3.2 ; Index 881

Q2 LIBOR 3.0%; Index 850

Q3 LIBOR 3.4%; Index 892.5

Q4 LIBOR 3.9%; Index 900

At the final settlement date, the equity-return payer will:

**A)** receive $16,903. **B)** receive $97. **C)** pay $16,903.

**Your answer: C was incorrect. The correct answer was B)** receive $97.

The equity return payer will pay the equity return and receive the floating rate return which is based on the Q3 realized LIBOR.

[0.034 × (90/360) − (900/892.5 − 1)] × 1,000,000 = $96.64

Can someone please explain why you would use the Q4 and Q3 index figures to calculate return rather than Q3-Q2 index figures?

Thanks a lot!