Question #40
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 17
Status: Unattempted
Question
Consider a 1-year, $5 million semiannual-pay fixed-rate equity swap initiated when the equity index is 750 and swap fixed rate is 3.7%. Equity index was at 760 at first settlement. It is now 270 days since inception of the swap and the index is at 767, 90-day MRR is 3.4% (DF = 0.99157) and 270-day MRR is 3.7% (DF = 0.9730). What is the value of the swap to the fixed- rate payer?
Answer Choices:
A. $3,478
B. −$2,726
C. −$3,520
Explanation
For $100 notional, the value of the equity side is (767/760) x $100 = $100.921
Value of the semiannual –pay, fixed rate bond with 3.7% annual coupon =[100 + 3.7/2] x
0.99157 = $100.9914
Value of pay-fixed side = value of equity – value of fixed rate bond = $100.921 - $100.9914
= -$0.0704 (per $100 notional).
For $5 million notional, value = 50,000 x -0.0704 = -$3,520