Question
Consider an equity swap that calls for semi-annual payments for one year. The notional principal of the swap is $60 million. The party will receive
Consider an equity swap that calls for semi-annual payments for one year. The notional principal of the swap is $60 million. The party will receive the return on the S&P 500, which starts off at 2500. The current LIBOR term structure is as follows: Days Rate 180 6.4% 360 8.0%
(a) What is the fair fixed swap rate today? Use the same formula for the fixed rate on an interest rate swap.
(b) After 90 days, the new term structure is as follows: Days Rate 90 6.0% 270 7.2% Moreover, the S&P index is at 2600.
What is the price of the equity swap?
(c) Now assume that the counterparty pays a floating rate based on the previous LIBOR, instead of an equity return. Then what is the price of the interest rate swap?
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