8. A diversified portfolio with a market value of $800,000,000 currently has the following allocations:

Equity 80% $640,000,000 Bonds 20% $160,000,000 The equity portion of the portfolio is allocated as follows:

US large-cap stocks 70% $448,000,000 International stocks 30% $192,000,000 The bond portion of the portfolio is allocated as follows:

US government bonds 80% $128,000,000 US corporate bonds 20% $32,000,000 The portfolio manager wishes to change the overall allocation of the portfolio to 75%

equity and 25% bonds. Within the equity category, the new allocation is to be 75% US large cap and 25% international stocks. In the bond category, the new allocation is to be 75% US government bonds and 25% US corporate bonds. The manager wants to use four-year swaps to achieve the desired allocations, with settlements at the end of each year.

Assume that the counterparty payments or receipts are tied to Libor. Use generic stock or bond indices where appropriate. Indicate how the manager can use swaps to achieve the desired allocations. Construct the most efficient overall swap, in which all equivalent but opposite Libor payments are consolidated.