Swap EOC Schweser Book 4, Question 7

CFA Level III Derivatives
#1

“A firm has an $8 Million portfolio of large-cap stocks. The firm enters into an equity swap to pay a return based on the DJIA and receive a return based on the Russell 2000. To achieve an effective 60/40 mix of large-cap and small-cap exposure, the notional principal of the swap should be:”

A. $6.0 Million

B. $4.8 Million

C. $3.2 Million

Why isn’t it B because you want to have 60% large-cap of the $8 Million worth of large-cap, so that’s $8*.6=$4.8 Million. And what is the swap here doing? Is it receiving small cap exposure and losing large-cap exposure?

#2

you need 4.8 Large, 3.2 Small (at the end of the swap).

So you give up return on 3.2 Large, receive return on 3.2 Small Cap.

So your notional = 3.2 M.

Hope this helps