Hi all,

Can you please look into this and help me out? My question is why F(0,h,m) = 0.012 while it should be 0.007?

From what I understand the answer, the author use 0.048/4 = 0.012. But per formula given in textbook, shouldn’t it be F(0, h, m) ?

RRCA entered into a one-year equity swap 30 days ago. Under the terms of the swap, the fund will receive the return on the S&P/ASX 300 Metals & Mining Index and pay a fixed annual interest rate of 4.8% on notional principal of $75,000,000. The swap calls for quarterly payments. At the time the swap was initiated, 30 days ago, the value of the S&P/ASX 300 was 3,250. The value of the S&P/ASX 300 today is 3,738. Merinar wants to determine the market value of the equity swap today using the current term structure of interest rates presented in Exhibit 1.

Exhibit 1:

Days LIBORs

60 1.42

150 1.84

240 2.12

330 3.42

Using the information provided in Exhibit 1, the market value of the equity swap is closest to:

[3738/3250] – 0.9696 – ( **0.012** )(0.9976+0.9924+0.9861+0.9696) = 0.13333

MV of swap = 0.1333 * $75,000,000 = $9,997,500