On December 2, the manager of a tactical asset allocation fund that is currently invested entirely in
Question:
To effect this change, she has chosen to enter into the "receive equity index" side of a one-year equity swap based on movements in the S&P 500 Index plus a spread of 10 basis points. The swap is to have quarterly settlement payments, with the floating-rate side of the agreement pegged to three-month LIBOR denominated in U.S. dollars. At the origination of the swap, the value of the S&P 500 Index was 463.11 and three-month LIBOR was 3.50 percent. The notional principal of the swap is set for the life of the agreement at $50 million, which matches the amount of debt holdings in the fund that she would like to convert to equity.
a. Calculate the net cash receipt or payment-from the fund manager's perspective-on each future settlement date, assuming the value for the S&P 500 index (with all dividends reinvested) and LIBOR are as follows:
b. Explain why the fund manager might want the notional principal on this swap to vary over time and what the most logical pattern for this variation wouldbe.
PortfolioA portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
Investment Analysis and Portfolio Management
ISBN: 978-0538482387
10th Edition
Authors: Frank K. Reilly, Keith C. Brown
Question Posted: