Question

1. Consider a $80 million, 1-year tenor, semiannual-pay floating-rate equity swap initiated when the equity index is 1428 and 180-day LIBOR is 4.2%. After 90 days the index is at 1476, 90-day LIBOR is 4.5% and 270-day LIBOR is 4.7%. What is the value of the swap to the floating-rate payer?

A) -$1,917,600.                                           C)    $1,799,088.

B)   $1,917,600.                                             D) $1,799,088.

Answer 1

The answer is B) $1,917,600

For semi annual pay floating equity swap, the payment is every 180 days.

1.021 = 1+0.021 (180 day libor rate 0.042/2=0.021 since it is semi annual)

1.01125= 1+0.01125 (90 day libor rate 0.045/4=0.01125, 360/90=4)

initial equity index/ 90 day index= 1476/1428

= 1.03361 * 80 million

=$ 82688800

The present value of the floating rate side after 90 days =  1.021/1.01125 = 1.00964

= 1.00964*80 million

= $ 80771200

The value of swap to the floating rate payer= $82688800- $80771200

= $1917600

So, the correct option is B) $1,917,600