Recompute the market value under the assumption that the counterparty pays a floating rate instead…

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Consider an equity swap that calls for semiannual payments for one year. The party will receive the return on the Dow Jones Industrial Average (DJIA), which starts off at 10033.27. The current LIBOR term structure is

Days

Rate

180

7.2%

360

8.0%

A. In Practice Problem 4, we determined that the fixed rate for a one-year interest rate swap given the above term structure was 0.0392. Given this term structure data, what is the fixed rate in an equity swap calling for the party to pay a fixed rate and receive the return on the DJIA?

B. Find the market value of the swap 90 days later if the new term structure is

Days

Rate

90

7.1%

270

7.4%

The notional principal of the swap is $60 million. The DJIA is at 9955.14. Again, these are the same rates as in Practice Problem 4, for which we computed B90(180) = 0.9826 and B9,(360) = 0.9474.

C. Recompute the market value under the assumption that the counterparty pays a floating rate instead of a fixed rate.

D. Recompute the market value under the assumption that the counterparty pays the return on the Dow Jones Transportation Index, which started off at 2835.17 and 90 days later is 2842.44.

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