Derivatives- Swap Pricing

CFA Level II Derivatives
#1

Hi - I was working on Example 19, Reading 40 on Pricing and Valuation of forward commitments. I am stuck on the 2nd part of that example. Cant figure out how they determined the stock price at which the value of the swap will be 0. Would anyone be able to please explain?

I am new to this forum, so please let me know if i should be providing additional information.

Thank you!

#2

I took a look at the example and the explanation. All I can say is that their notation is grotesque! I cannot imagine that any sane person thinks that that will help a candidate learn the material (which is quite easy, by the way).

Consider thinking about it this way:

  • The present value of the fixed cash flow is 10,216,019
  • The notional amount is 10,000,000
  • For the swap to have a value of zero, the present value of the equity leg has to be 10,216,019
  • Therefore, the equity price has to be 10,216,019 / 10,000,000 × 100 per share = 102.16019 per share
#3

This really helps! Thank you so much! :slight_smile:

#4

My pleasure.

It shouldn’t be complicated; I don’t know why they make the notation so awful.