swap Q LIBOR, equity, 314

zbird2134

Consider a semiannual equity swap based on an index at 985 and a fixed rate of 4.4%. 90 days after the initiation of the swap, the index is at 982 and London Interbank Offered Rate (LIBOR) is 4.6% for 90 days and 4.8% for 270 days. The value of the swap to the equity payer, based on a $2 million notional value is closest to:

A) $22,314.
B) −$22,564.
C) $22,564.

luda002

I need to go back and check, but I'll try to do it based on some common sense... looks like the equity return is -0.3%, while the equity holder gets 2.2% return after 90 days. So, if you discount 0.022*$2m for 90 days minus the 0.3% * $2m loss on the equity portion, you get something close to $36k...which I don't see in the answers choices!

hassan

equity payer:
982/985 - 1= -0.0003045 = -0.3045%

LIBOR
Fixed rate: 4.4% = 0.022 per 180 days

90 4.6 -> 1/(1+.046*90/360) = 0.9886
270 4.8 -> 1/(1+0.048*270/360) = 0.9652

Received Fixed = 0.022 * (0.9886+0.9652) + 0.9652 = 1.00818366

Pay Equity, receive Fixed = 982/985 - 1.00818366 = -0.01122935

for 2 Mill Notional = -22458 ~~ Choice B

CP

economicz

Answer is C. Its from Qbank.

cpk, you rock man..I cant even attempt such questions and you get the answer to the last point..

Editing my post, I see the reason why it is positive now...



Edited 1 time(s). Last edit at Thursday, May 13, 2010 at 10:25PM by acer.

profil

Its a semi-annual swap, so coupon payment will be made once in 6months. the swap is already 90 days in, thus first cpn payment will be made 90 days from now and 270 days from now.

.9886 = discount factor for 90 days i.e. value of 1 dollar today, which will be paid 90 days from now
.9652 = discount factor for 270 days i.e. value of 1 dollar today, which will be paid 270 days fron now.

.022 is the cpn payment.

If that helps....

SpyAli

it should be -ve value - so B is the answer... not C as u have written...

please check.

CP

yospaghetti

I got choice C

Equity Side = 982/985 = .996954

Fixed Side:

.988631*.022 = .02175
.965251*1.022 = .98646
Total = 1.008236

Value of $1 notional = 1.008236 - .996954 = .011282

Value of $2 million notional = .011282*2000000 = 22564.1

NO EXCUSES

maryli

I should also mention, this is a no excuses question. It's as straightforward as it gets.

NO EXCUSES

kickthatcfa

I choose C

Equity value:

982/985 * 2,000,000 = 1,993,908.65

Fixed value

You know the payment semi annually = 4.4% x 2,000,000 x 180/360 = 44,000

So we have two payments to be received,

1. 44,000 at 180 day and 2. 2,044,000 at 360 day

So discount both of them till today

1. 44000/(1+0.046 x 90/360) = 43499.75

2. 2,044,000/(1+0.048 x 270/360) = 1,972,972.97

Add both of them = 2,016,472.72

Now since we are going to receive the fixed payment and make the equity payment, the answer is 2,016,472.72 - 1,993,908.65 = 22,564.07



Edited 1 time(s). Last edit at Thursday, May 13, 2010 at 11:23PM by idreesz.

ayaz_mahmud369

Looks easy after the fact! One problem I had was with the swap period...I don't see how you all assumed it's a one-year swap! Why stop at 270 days when you discount future coupons? Are you just guessing that since they didn't provide other LIBOR rates, you stop there? If it were a 2-year swap, or 6-month swap, the fixed payment would be different...am I right on that?

Another point is that if I sell you the return of my equity portfolio in exchange for 4.4% fixed return (which seems to be the situation here), and my portfolio's value drops at year end, I get compensated for the drop *and* earn 4.4% interest! Sounds weird, doesn't it? If my portfolio goes up 5%, I pay you 5% and you pay me 4.4%. Am I right again on that? If so, then what I have done is equivalent to buying a put on my portfolio *and* earning interest on my portfolio's value as of beginning of year. Again, it sounds bizarre to me, as I'm getting a free put, and free interest...someone stop me please.