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

At initiation, an equity swap in which one party pays a fixed rate and receives the return on a stock index is most likely priced so that the:

The swap most likely has zero value to both parties at initiation. The fixed rate is set so the present value of the fixed payments equals the present value of the equity leg, which is the notional amount, so neither side pays anything upfront.

  1. Aswap has a value of zero to both partiesCorrect
  2. Bfixed rate equals the expected dividend yield
  3. Cfixed rate equals the index's expected return

Explanation

Like other swaps, an equity swap is set so the present value of the payments on each leg is equal at initiation, so the swap has zero value to both parties. The fixed rate is the swap rate from the interest rate curve, not the expected index return or dividend yield.

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