Total Return Equity Swap

CFA Level III
#1

Ok, can someone please help clear up this language?

An investor has a concentrated posiiton of stock.

Investor enters a total return equity swap to pay the total return of $5 million of PBL and receives LIBOR. He is fully hedged. If stock return exceeds libor, investor pays the difference, which eliminates any gains on stock. If the stock return is less than the LIBOR, investor receives the difference, so his return is libor.

So putting numbers… lets say the stock return is 5%, and the LIBOR return is 4%. How much does his actually pay?

How much if the stock return is 3% and libor is 4%?

Thanks guys. 1 week to go!!!

#2

Wasn’t that calculation part of Level II? I seem to remember it.

For quarterly payment, PBL 5%, Libor 4%, investor pays (5%-4%/4)=4% of the nominal amount

#3

1> On 5% stock return, he pays 5% and receives 4% --> Net pay 1%.

2> On 3 % stock return, he pays 3% and receives 4 % --> Net receive 1%

Adding one more scenario for you:

3> Stock return -2%, he pays -2% (or receives 2%), receives 4% --> Net receives 6%.

#4

#dontforgetinvestorownsPBL

#5

GOT IT. thinking aobut it NET makes Sense… Thanks guys.