b_sea93

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

wizofoz

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)

Rasec

Answer is C as per the QBank.



Edited 2 time(s). Last edit at Friday, May 14, 2010 at 08:41AM by acer.

neil1234

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

zephyranalyst

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...

Uranus08

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....

YAhmed

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.

bbtomato

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?

xilige

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.