In the case Tyra Merinar, the first questions is: Using the Information provided in exhibit 1, the market value of the equity swap is closest to? The answer from CFAI is: The market value of the swap = 0.1333 × $75,000,000 = $9,997,500 There is no explanation where 0.13333 comes from. Can someone shed some light? Thanks in advance. PS: the new online format of the CFAI mocks is extremely poor, I hope they’ll fix it for next year.
Maybe someone can help both of us with this one. I’m confused as well…
(3,738 / 3,250) - .969603 - (.012)(.9976+…+…+…) = .1332025
Gain on index - discount factor for end of contract - .012 (no idea where this comes from) times discount factors @ pmt dates = .1332025
Where does the .012 come from? The only thing I can think of is the annual fixed payment rate of 4.8% / 4 = .012
Thanks!!
For each dollar notional the value of the equity swap is $0.1333 which is calculated as follows:
(3738/3250) - 0.9696 - 0.012x(0.9976+0.9924+0.9861+0.9696).
The (3738/3250) derives the present value of the index position per $1 notional. You receive that and pay quarterly fixed at an annual rate of 4.8%, or $0.012 per quarter. You need to bring the $0.012 payments, plus the $1 terminal cash flow back to the present using the present value discount factors calculated from the term structure. For example, LIBOR60 = 1 / (1 + 0.0142x(60/360)) = 0.9976.
I think i’m missing the intuition. What am i not getting?..
I entered the entire problem into excel (and got $9,990,190 as stated) but i changed only 1 input. I have all of the inputs set exactly like the problem, except i change the number of periods the settlement occurs per year from 4 (quarterly payments) to 12 (monthly payments). that changes the .012 number to .004 (.048/12).
Why does the value of the swap INCREASE to $12,357,608? If you are settling the contract MORE often, wouldn’t the value decrease? Wouldn’t their be LESS time until the next settlement time which would be LESS time value? Unless i’m not thinking about this problem correctly.
Thanks!!