just as i thought i understood this… came across this question X enters into a 2yr equity swap receiving the rate of return on the index, and will pay the fixed IR. the swap has annual payments. fixed rate on the date of initiation is 4.99%. the index is at 757.09 at the beginning of the swap and the notional principal is 100million 100 days later the index is at 723.86, and the term structure of rate is as follows 260 day-LIBOR 0.0442, DF 0.9691 620 day LIBOR 0.499, DF 0.9209 wats X’s position in the swap 100 days after the initiation… Need step by step explanation if possible…
come on man, no spoilers without calling them that… Step by step tho… Guess A, move on
Arrghh…got my mistake… :S thanks anyways lemme know if u wanna know the ans. 
terabyte Wrote: ------------------------------------------------------- > Arrghh…got my mistake… :S thanks anyways lemme > know if u wanna know the ans. Pray tell …
Formulatic way of doing it: http://www.wolframalpha.com/input/?i=100000000*+(+723.86%2F757.09+-+0.0499*(1%2F(1%2B0.0442*260%2F360)+%2B+1%2F(1%2B0.0499*620%2F360))±+1%2F(1%2B0.0499*620%2F360)+) The formula is in the CFAI books but not schweser. I dunno why. Remembering formula is much easier for me than doing the steps schweser list in the books. If you look at my link, you should be able to figure out the formula.
so 5.9million is my answer
-5,910,000 it is!
I saw it last night on the mock… but for those who havent taken it, get that word spoiler up there in the subject… for real tho, I couldnt do it and will be examining tonight… I multiplied 723.86 by 1.06^(260/360) = roughly 1.04. this gave me forward amount of 752 in one year… when you entered the contract the forward price was 802 (757*1.06) so i took the difference of 802 and 752 = 50… took the total amoutn of shares of the index i could buy (100M/757 = 132,100) multiplied that by 132,100 by 50 and was at like 6.5M, which was nowhere near the answer… so i guessed closest and moved on
I got -5,906,125.30 What were your steps?
the rough translation of the formula: value floating = index new / index old value fixed = original fixed rate * days in period / 360 * ( sum of new discount factors ) + the final new discount factor i.e. furthest in future value total = value floating - value fixed
or exactly => [(723.86/757.09) - ((0.0499*0.9691)+1.0499*(0.9209))] *100mil
I got -5,909,174.339, your 620 day LIBOR reads.499, I almost interpreted that at 49% haha
[(723.86/757.09) - ((0.0499*0.9691)+1.0499*(0.9209))] *100mil easiest way to do it. Good job terabyte. Calc value of fixed swap the same way as always, then calc change in equity value
Why would you add the notional amount (the 1.0499 below) when there is notional exchanged in an equity swap… [(723.86/757.09) - ((0.0499*0.9691)+1.0499*(0.9209))] *100mil
one side pays the return on the equity side, the other side here is paying a fixed rate. so the fixed rate side has that .0499 x .9691 (this is at year 1, you pay that fixed interest rate) and then at the end of the swap at 2 yrs, you pay not only that next interest payment, but you return the principal. so the .0499 is the interest payment and the 1 is the principal, hence the 1.0499 at the end of the swap.
I made a mistake in my post… I meant ‘’…when there is NO notional exchanged in an equity swap… ‘’ So why would you add the 1…