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标题: swap Q [打印本页]

作者: zbird2134    时间: 2011-7-11 19:49     标题: swap Q

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.
作者: luda002    时间: 2011-7-11 19:49

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!
作者: hassan    时间: 2011-7-11 19:49

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
作者: economicz    时间: 2011-7-11 19:49

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.
作者: profil    时间: 2011-7-11 19:49

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....
作者: SpyAli    时间: 2011-7-11 19:49

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

please check.

CP
作者: yospaghetti    时间: 2011-7-11 19:49

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
作者: maryli    时间: 2011-7-11 19:49

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

NO EXCUSES
作者: kickthatcfa    时间: 2011-7-11 19:49

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.
作者: ayaz_mahmud369    时间: 2011-7-11 19:49

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.
作者: b_sea93    时间: 2011-7-11 19:49

Dreary , if they have more periods out , they have to provide more LIBOR forward rates too. So If they don't give , you don't ask ( the question ).

Its a swap expiring after two payments
作者: wizofoz    时间: 2011-7-11 19:49

Dreary Wrote:
-------------------------------------------------------
> 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?

YES YOU ARE RIGHT, based on answers I estimate :-) that it is a 1y s/a swap and correct answer is C

>
> 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.

NO YOU ARE WRONG

you have portfolio
and you inter into an equity swap: where you short-sell your portfolio and instead of it you invest into fixed-rate bond (if you split the swap into two legs)
there is no option in there

if portfolio price goes down, you earn on your short position in portfolio and you earn on your fixed rate bond (but you have you initial position in your portfolio where you lose)

if portfolio price goes up, you lose on your short position in portfolio and you earn on your fixed rate bond (but you have you initial position in your portfolio where you lose)

whatever happens to portfolio price you earn fixed interest and that is exactly what you wanted to achieve (get rid off the portfolio risk and receive fixed income, but without real selling of your portfolio)
作者: Rasec    时间: 2011-7-11 19:49

Answer is C as per the QBank.



Edited 2 time(s). Last edit at Friday, May 14, 2010 at 08:41AM by acer.
作者: neil1234    时间: 2011-7-11 19:49

Your "rounding" error is due to choosing the wrong Discount factor for the return of $1 .

You calculated :
.022*(.9652+.9886)+.9652

should be :
022*(.9652+.9886)+.9886
作者: zephyranalyst    时间: 2011-7-11 19:49

FIXED SIDE:
Payment in 90 days = 44,000
Payment in 270 days = 2,044,000

PV of payment 1 = 43,499.75
PV of payment 2 = 1,972,972.97
Total PV of fixed payments = 2,016,472.73

EQUITY SIDE:
Value = 982/985 x notional = 1,993,908.63

Value to equity side:
equity payer pays equity, receives fixed: 2,016,472.73 - 1,993,908.63 = 22,564.10

Choice "C". Anyone having trouble with swaps, i strongly recommend using my above layout. I can't be bothered using all the fractions schweser presents...
作者: Uranus08    时间: 2011-7-11 19:49

jackofalltrades Wrote:
-------------------------------------------------------
> What is the logic behind this calculation:
>
> "Received Fixed = 0.022 * (0.9886+0.9652) + 0.9652
> = 1.00818366"
>
> Is there another more intuitive way to arrive at
> the value of the fixed instrument?

look at my calculation above - i can't get into all those factor calculations either. I strongly feel my way is better - its just doing some basic DCF....
作者: YAhmed    时间: 2011-7-11 19:49

cpk123 Wrote:
-------------------------------------------------------
> it will be 0.9652...
>
> since it is at 270 days that you will get
> principal back...


Agreed. I think the question is slightly off in its calculation.
作者: bbtomato    时间: 2011-7-11 19:49

pfcfaataf, wow... that makes a lot of sense! Why do I need a swap to do that? I could do it myself if my broker allows for shorting against my own portfolio without requiring margin, I think it's called shorting against the box..take the proceeds and invest in a fixed return. True, but let us see how to do it as a swap.

To do it as a swap, who sells what? I still keep my portfolio, right? I sign a swap agreement where the return on the portfolio is yours (positive or negative). You agree to pay me a fixed return of 4.4% by year end. I don't have to do anything...just sit and watch...what do you have to do? Also, sit and watch? By year end, portfolio is down 20%. You pay me for the loss. You do some calculation and pay me the interest on my initial portfolio value. You lost quite a bit.

Assume by year end, portfolio is up 20%. I pay you with cash all that gain. You do some calculation and pay me the interest on my initial portfolio value. Sounds more convenient than doing it myself!

Is that correct?
作者: xilige    时间: 2011-7-11 19:49

CFABLACKBELT Wrote:
-------------------------------------------------------
> cpk123 Wrote:
> --------------------------------------------------
> -----
> > it will be 0.9652...
> >
> > since it is at 270 days that you will get
> > principal back...
>
>
> Agreed. I think the question is slightly off in
> its calculation.

Nvm, there is a sslight rounding error in my calculation, but its not due to picking .9652 over ,9886. See bpbuldog's calc. He took it out a few more decimal points.




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