Live Mock PM #50 payments, question, correct

onelife1

Can anyone help with this question
Based on current LIBOR spot rates, the value of the equity swap to McClaren today (after settlement) is closest to:
A) ￡19,420.
B) ?￡89,620.
C) ?￡129,620.
Your answer: A was incorrect. The correct answer was C) ?￡129,620.
The present value (per ￡) of the fixed rate payments is:
For a 10 million notional value the value of the fixed rate payments is:
1.012962(10,000,000) = 10,129,621
Since the value of the equity side of the swap returns to the notional value (10 million) at each settlement date, the net value of the pay fixed position is ?￡129,621.
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I have no problem with the fixed side I just don’t understand why the equity side should not have any value. Given that it settles every 180 days and day 360, which is t=now, should be a settlement date then it make sense that the value should be the return on the index since the last settlement at 180. The paragraph mentions that ‘The equity payments are based on index returns and net payments on the swap are made at settlement every 180 days. Since the inception of the swap, the index has risen from 5000 to 5478 at a fairly steady rate’.
If they had of provided it, I would have assumed the value to have been the difference in the index since the last settlement.
Why did they not provide it? Error? Why is the value just assumed to be 10m?

brain_wash_your

Yeah I have no problems with the fixed side calculation but just got frustrated by the equity side because the lack of information made me feel like I was missing something. Bit of a dirty question in my opinion.

stalkey

yea. the key i guess is to realize the contract was just settled, so the equity payer has not current payments due.

dyga

Thanks. Will keep that in mind. Still a tricky wording…