Official Mock Derivative question

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:


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

If you’re paying a 4.8% annual rate on a quarterly basis, that quarterly payment would be 4.8%/4.

You take the PV of that quarterly payment, over the remaining life of the swap, plus the PV of the notional, to determine the value of the fixed leg.

Not sure where your issue is or where 0.007 is coming from.

Hi ro424,

Thanks for looking into this. But per formula in the text, isnt it should be F(0,h,m). 0.007 is the result of calculating the F(0,h,m).

I know 0.012 is coming from dividing 4. But not sure why it is applied here instead of 0.007.

Because you’re given the swap rate already as it’s the actual rate you’re paying, you aren’t trying to calculate it.