An asset manager wishes to reduce his exposure to the small cap stocks in his po

Question

An asset manager wishes to reduce his exposure to the small cap stocks in his portfolio by using a swap in which he agrees to pay a dealer the return on a small-cap index based on a notional $50,000,000. In return, the dealer agrees to pay him a fixed return of 5% on the same notional amount. The payments are semi-annual and the fixed payments are based on a 30-day per month and 365-days per year calculation. If the small cap index goes moves from 220.00 to 215.00 during the semi-annual period, what net payment will the dealer pay to the asset manager at the end of the period?

$2,423,389

$2,482,877

$2,369,240

$2,452,389

$2,395,667

Explanation / Answer

PAYMENT BY DEALER = 50,000,000 X 5% X 180/365 = 1232876.71

THE SMALL CAP INDEX GOES DOWN FROM 220 TO 215

SO VALUE OF PORTFOLIO WILL BE = 215/220 * 50,000,000 = 48863636.36

LOSS ON PORTFOLIO = 50,000,000 - 48863636.36 = 1136363.64

DEALER HAS TO BEAR THE LOSS AND ALSO HAS TO PAY INTEREST

SO PAYMENT BY DEALER TO ASSET MANAGER =  1232876.71 + 1136363.64 = 2369240.35

SO CORRECT ANSWER : $2369240

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.