Question #37
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 16
Status: Unattempted
Correct Answer: A
Question
In an equity return swap for MRR, if the return on the underlying equity portfolio is negative for a payment period, the equity return payer will:
Answer Choices:
A. receive a net payment greater than the loss of value on the equity portfolio
B. make a net payment greater than the loss of value on the equity portfolio
C. receive a net payment less than the loss of value on the equity portfolio
Explanation
The equity return payer will receive the periodic interest payment and "pay" the negative
return on the portfolio, resulting in a net payment to the equity return payer that is
greater than the loss on the equity portfolio.
(Module 30.8, LOS 30.g)
(floating rate −fixed rate) (
) (notional principal)
90
360
(0.034 −0.029) (
) (€4m) = €5, 000
90
360
90
360
= €4, 958
€5,000
1.0085
Typesetting math: 100%