Normally to calculate swap I would go step by step, PV of fixed payment , PV of floating payment
In question 43 to calculate RECEIVER SWAPTION, can anyone please explain the rationale for it, especially why they subtract 0.969 from return of index (15%)?
P/S: Do you usually do quick way like this or you would go step by step to make sure you dont miss anything ( but chance of mistake increase)
43 is an equity swap not a swaption…They state that under the terms of the swap they receive the return on the index and pay fixed. They are doing the return of the index - the fixed payment.
The return on the index is the fraction like you said and then they subtrace the fixed which can be written
Now I got the rationale behind but still, why they subtract 0.969 from return of index (15%)?? 0.969 is discount factor for 720 days . Thought the floating rate payment need to be discount using 180 days rate? Anyone?
there is no floating - it is the equity return vs the fixed
the -.969 is the second term i wrote for the fixed - the 1 * ,969, it is the pv of the principal
.9696 is the z4 . it is 1/(1-(.0342^(330/360)))
Oh thanks. But I thought equity return is considered Floating rate?
oh ok, i meant that there wasn’t the traditional floating thing, it was an equity return.
The equity return is just the fraction, nothing else, just the single term