Swap calculation

CFA Level II Derivatives
#1

Hi,

I am not very clear of the calculation of swap with fixed and floating sides.

An example is from the notebook,

A Bank entered into a $5,000,000, 1 year equity swap with quarterly payments 300 days ago. The bank agreed to pay an annual fixed rate of 4% and receive the returns on an international equity index. The index was trading at 3,000 at the end of the third quarter, 30 days ago. The current 60 day LIBOR rate is 3.6%, the discount factor is 0.9940 and the index is now at 3150. The value of the swap to the bank is:

a) -257,795 b) -114 676 C) $155 401 D) $230,300

The answer is calculated as :

value of fixed side: 5000000*(1+1%)*0.9940=5019700

value of floating side: 5000000*（3150/3000）=5250000

so the gap is answer D.

My question is why the dividend is not included in the floating side as it’s paid quarterly. When the index is 3000 at the end of 3rd quarter, the payment shall be 5000000+1%dividend.But the answer just take 5000000.

Please let me know where I am wrong.

Thank you in advance.

#2

I do not see a dividend payment being mentioned in your example?

#3

Sorry, not dividend, it has quarterly payment. we don’t need to add that?

#4

It is reset every quarter.

#5

You mean the index related floating side will always be 5000000 at the end of each quarter?

#6

Yes.

#7

Thank you.

That solves my confuse on why the calculation base always be the principal for index related floating side.