You manage an index fund of the Dow Jones Index. You believe the Dow Jones Index will take a drop in the next year and do not want to take the risk. You do not want to liquidate your portfolio due to transaction costs and you think the Dow will rebound after the one-year period. You wish to enter into a swap with Apex investment bank that is willing to take the Dow risk for a fixed amount. You have agreed with Apex to swap a fixed return for the Dow Index return. Your fund has $100 million invested in the Dow Index and you agree to an equity swap for the full amount with Apex. The agreement is signed on December 31, 2014. The Dow Index is 17,823.07 on December 31, 2014. One swap payment will be made at the end of the year on December 31, 2015. Apex agrees to pay 5%.

a. What is your return, if the Dow Index is at 19,000 on December 31, 2015? What is Apexs return?

b. What is your return, if the Dow Index is at 18,000 on December 31, 2015? What is Apexs return?

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