AN ASSET MANAGER WISHES TO ENTER INTO A TWO-YEAR EQUITY SWAP IN WHICH HE WILL RECEIVE THE RATE OF RETURN ON THE FTSE/JSE ALL SHARE INDEX (ALSI) IN EXCHANGE FOR PAYING A FIXED INTEREST RATE (SWAP RATE). THE ALSI IS AT 50526 AT THE BEGINNING OF THE SWAP. THE SWAP CALLS FOR SEMI-ANNUAL PAYMENTS. THE TERM STRUCTURE AT THE BEGINNING OF THE SWAP AND PRESENT VALUE FACTORS ARE:

  L0(180)  = 0.0252 (0.9876)
  L0(360)  = 0.0310 (0.9699)
  L0(540)  = 0.0368 (0.9477)
  L0(720)  = 0.0402 (0.9256)

Suppose that the new term structure and present value factors after 160 days are:

  L0(020)  = 0.0539 (0.9970)
  L0(200)  = 0.0610 (0.9672)
  L0(380)  = 0.0649 (0.9359)
  L0(560)  = 0.0699 (0.9019)

The ALSI is at 52860 after 160 days. The notional principal of the swap is R50 million.

Question 1

Calculate the semi-annual as well as the annualised FIXED RATE on this swap.

Semi-annual swap rate: Answer
%

Annualised swap rate : Answer
%

Enter your answer as a percentage, rounded to two decimal places (e.g., 9.87).

Question 2

Assume that the semi-annual fixed or swap rate is 2.00% and calculate the FIXED RETURN (total of discounted payments) by completing the following table:

1st payment (020 days): 997000

2nd payment (200 days): Answer

3rd payment (380 days): Answer

4th payment (560 days): Answer

Notional amount:        Answer

TOTAL (FIXED RETURN):   Answer

Round every input to the nearest Rand value if required (e.g., 1234567).

Question 3

Calculate the value of the equity payment or EQUITY RETURN.

Equity return: Answer

Round your answer to the nearest R100 (e.g., 1234500).

Question 4

Determine the MARKET VALUE of a swap to pay the fixed return and receive the equity return.