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 4o/o and receive the return 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 LIB OR rate is 3.6%, the discount factor is 0.9940, and the index is now at 3,150. What is the value of the swap to the bank? The answer is: 230,300 Can anyone help me solve the question? Thanks!
Thanks!
Interesting to note here is that, we consider an entire year’s interest for the bank to pay but only 30 days equity index return for the bank to receive. Isn’t that unfair?
I couldn’t arrive at the answer as I was consider only 30/360 part of 4% that the bank will pay. Isn’t that the case?
They do take into account the fact that there are only 60 days left, because when you use the discount factor, if it’s not given you want to compute it this way: 1/(1+(0.036*60/360)). The coupon rate doesn’t have to be adjusted by the # of days left, only LIBOR does.