Help with Schweser Qbank question on Equity Swap

CFA Level I Derivatives
#1

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!

#2

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:_

In equity swaps the sttlements take place at the end of every quarter. At the end of Q3 you would use Q3&Q2 value.

In this question they have asked what woud the equity-return payer at the final settlement date Q4 … Hence we use Q3 & Q4 values