Question

6

An investor entered into a 1-year equity swap in which he receives the return on stock index X and pays the return on stock index Y. The notional amount is $2.8MM, and the payments are done quarterly. Given the following index prices, what is the value of the swap after 200 days pass?

Price	At initiation	At the end of first settlement	At the end of second settlement	200 days after initiation
Stock Index X	1850	1910	1905	1970
Stock Index Y	15320	16750	16490	16830

Review Later

$37,806

$45,941

$33,210

$40,657

Answer 1

As the swap is settled quarterly, the value of the swap is zero at each settlement date (end of each quarter). This is because the settlement is done at the end of the quarter. The value of the swap changes between the settlement dates.

Value of swap after 200 days = Absolute value of [(return on X - return on Y) * notional value]

return on X = (value of X after 200 days - value of X at end of 2nd settlement) / value of X at end of 2nd settlement

return on X = (value of Y after 200 days - value of Y at end of 2nd settlement) / value of Y at end of 2nd settlement

Value of swap after 200 days = Absolute value of [((1970 - 1905) / 1905) - ((16830 - 16490) / 16490) * $2,800,000]

Value of swap after 200 days = $37,806