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equity swap

jlahuerta

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Thread starter #1
please, someone could explain me the result of this question:
A bank holds USD 60 USD worth of 10 yera 6,5% coupon bonds that are trading at the clean Price of 101,82.The bank is worried by the exposure due to these bonds but cannot unwind rhe position for fear of upsetting the client.Therefore, it purchase a total return sawp (trs) in which it receives anual libro + 100 bps in return for the mark-to-market return on the bond.For the first year, the libor sets at 6,25 % and by the end of the year the clean orice of the bonds is at 99,35 The net receipt/payment for the bank in the total return will be :

Best regards
 

Flashback

Active Member
#2
Supposed $60 M is a Notional value (not $60).
Net SWAP settlement in the first year under assumption of annual settlement frequency is:
+ 60 M x (0.0625 + 0.01) - 60 M x (((99.35/101.82)-1) + 0.065) = $ 1.9 M
 

Flashback

Active Member
#4
You're welcome. Above is referred to a Total Return swap. An equity swap has only (Rt1/Rt-1)-1) equity return component (usually underlied on certain Stock Index) and on another side is fixed rate return component or LIBOR + spread, depending on contract.
The difference between two is in following:
- Total Return swap might not be referred to an equity index like an equty swap than on particular asset class (like a bond)
- Total Return swap has an interim cash flow (dividend or coupon payment) component which should be settled together with an asset return
 
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