Hi All- I am really confused about how to price and value equity swaps. It seems to me that they are priced in the same way that rates swaps are priced. However if you listened to the Schweser online course, they mentioned that the rates swaps pricing has changed and now the curriculum is simplified for valuing a swap between dates, we even received some simplified slides. However when I read Cfai they still seem to be using the more complex technique in valuing the equity swaps.
Can you please help? I don’t even understand which formulas to use. Thank you in advance
Equity swaps and plain vanilla interest rate swaps are valued identically, bearing in mind that the present value of the equity leg is the notional value increased or decreased by the equity return since the last settlement date.
Honestly, it’s really disappointing how CFA is explaining in general SWAP but in particular equity swap.
Just one example, without saying to much… and then each time you do an exercise you find out something new. Even after 7 complete Mocks (5 Schweser 1 CFA and one FITCH (fitch mocks are really bad: bad written, zero explanation in the solutions…)).
Hi @S2000magician , I find the formula for valuing equity swaps complex.
Conceptually, why are the formulas to value an equity swap so different, when we value it on settlement dates vs. between settlement dates?
On settlement dates:
Between settlement dates:
Value to the fixed rate payer = Implied valuation of pseudo equity investment – present value of remaining payments to be made
In the formula for the value on a settlement, date, the sum of the present values of the new swap fixed rate is one (1), so that formula is the notional less the PV of the old fixed payments, or the equity value less the PV of the old fixed payments. Note that this is the same as the formula for the value between settlement dates.
In general, the value of a derivative is the PV of what you will receive less the PV of what you will pay.
