Question

Question 7

An asset manager wishes to reduce his exposure to the small cap stocks in his portfolio by using a swap in which he agrees to pay a dealer the return on a small-cap index based on a notional $50,000,000. In return, the dealer agrees to pay him a fixed return of 5% on the same notional amount. The payments are semi-annual and the fixed payments are based on a 30-day per month and 365-days per year calculation. If the small cap index goes moves from 190.00 to 185.00 during the semi-annual period, what net payment will the dealer pay to the asset manager at the end of the period?

		$2,482,877
		$2,514,928
		$2,548,666
		$2,584,288
		$2,621,7665.

Answer 1

AN ASSET MANAGER WILL RECEIVE FROM DEALER FOLLOWING AMOUNT

= 50,000,000 X 5% X 180/365 =1232876.71

AND THERE IS A LOSS ON SMALL CAP INDEX, SO DEALER HAS TO ALSO PAY FOR THAT TO THE ASSET MANAGER

THE VALUE OF PORTFOLIO WA 50,000,000 WHEN INDEX WAS 190, SO VALUE OF PORTFOLIO WHEN INDEX IS 185 = 50,000,000 X 185/190 = 48684210.53

THE AMOUNT OF LOSS ON SMALL CAP INDEX = 50,000,000 - 48684210.53 = 1315789.47

SO TOTAL AMOUNT PAID BY DEALER TO ASSET MANAGER = 1232876.71 + 1315789.47 = 2548666.18

SO ANSWER IS : 2548666

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