“A firm has an $8 Million portfolio of large-cap stocks. The firm enters into an equity swap to pay a return based on the DJIA and receive a return based on the Russell 2000. To achieve an effective 60/40 mix of large-cap and small-cap exposure, the notional principal of the swap should be:”
A. $6.0 Million
B. $4.8 Million
C. $3.2 Million
Why isn’t it B because you want to have 60% large-cap of the $8 Million worth of large-cap, so that’s $8*.6=$4.8 Million. And what is the swap here doing? Is it receiving small cap exposure and losing large-cap exposure?