Question

Consider a $70 million semiannual-pay floating-rate equity swap initiated when the equity index is 1987 and 180-day LIBOR is 2.2%. After 90 days the index is at 2015, the 90-day LIBOR is 2.6%, the 180-day LIBOR is 2.8% and the 270-day LIBOR is 3.1%. What is the value of the swap to the equity-return payer?

	A.	$673,446..
	B.	$3,554,003.
	C.	$-596,331.
	D.	-$673,446

Answer 1

Given that.

initial equity index = 1987

After 90 days index = 2015

90 days LIBOR . = 2.6%

180 days LiBOR. =2.20%

Calculation of present value of floating rate after 90 days

90 days LIBOR = 1+0.026(90/360) =1.0065

180 days LIBOR = 1+0.022(180/360) = 1.011

PV = 1.011/1.0065 = 1.0044709388

Calculation of present value of equity index after 90 days

PV = (2015/ 1987) = 1.0140915953

The value of the swap to equity return payer would be as follows

Value = 70 millions*(1.0140915953 - 1.0044709388)

= 70 millions*0.0096206565 = $673,446

Hence,option A' is the correct