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CFA Level I · CFA Level I Exam · Pricing and Valuation of Interest Rate and Other Swaps

A fund enters a one-year equity swap with a notional of USD 10 million, paying the return on an equity index and receiving a fixed rate. The index starts at 2,000 and ends the year at 2,160, ignoring dividends. The fixed rate is 5.0%. The net payment made by the fund at settlement is closest to:

The fund pays about USD 0.30 million. The index return is 8%, giving an equity payment of USD 0.80 million, and the fixed leg returns USD 0.50 million at 5%, so the net payment is the USD 0.30 million difference.

  1. AUSD 0.30 millionCorrect
  2. BUSD 0.80 million
  3. CUSD 1.10 million

Explanation

Index return = 2,160/2,000 - 1 = 8.0%. Equity payment = 10 million x 8% = 0.80 million. Fixed receipt = 10 million x 5% = 0.50 million. Net payment by the fund = 0.80 - 0.50 = 0.30 million. The 0.80 option ignores the fixed receipt; 1.10 wrongly adds the fixed amount.

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