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)