LIBOR in Equity Swaps

CFA Level III
#1

In the CFAI EOC questions, readin 29, question 8, they have the following swaps:

receive return on us large-cap index in $2M

Pay Libor on $2M’

Pay return on international stock inded on $42M

receive libor on $42M

receive return on US gov bon index on $22M

pay libor on $22M

receive return on us corp bond index on $18M

pay libor on $18M

They net it all out so that there is no libor payments or receipts. Is this realistic? How can you tie all these exposures to Libor exactly? Shouldn’t most of these be Libor + X%, or a multiple of Libor?

Or do they just just tie it to libor and then charge an amount upfront to do the swap?

I dont understand how you can do this at all.

#2

I’ve never understood why the floating leg in an equity swap is always LIBOR. That assumes that the equity return is, on average, equivalent to a risk-free return, which is silly. In the real world I’d expect to pay LIBOR plus a spread.

Nevertheless, for the exam, it’s as easy as you say.