AN ASSET MANAGER WISHES TO ENTER INTO A TWO-YEAR EQUITY SWAP IN WHICH HE WILL RECEIVE THE RATE OF RETURN ON THE FTSE/JSE ALL SHARE INDEX (ALSI) IN EXCHANGE FOR PAYING A FIXED INTEREST RATE (SWAP RATE). THE ALSI IS AT 50526 AT THE BEGINNING OF THE SWAP. THE SWAP CALLS FOR SEMI-ANNUAL PAYMENTS. THE TERM STRUCTURE AT THE BEGINNING OF THE SWAP AND PRESENT VALUE FACTORS ARE:

  L0(180)  = 0.0252 (0.9876)
  L0(360)  = 0.0310 (0.9699)
  L0(540)  = 0.0368 (0.9477)
  L0(720)  = 0.0402 (0.9256)

Suppose that the new term structure and present value factors after 160 days are:

  L0(020)  = 0.0539 (0.9970)
  L0(200)  = 0.0610 (0.9672)
  L0(380)  = 0.0649 (0.9359)
  L0(560)  = 0.0699 (0.9019)

The ALSI is at 52860 after 160 days. The notional principal of the swap is R50 million.

Question 1

Calculate the semi-annual as well as the annualised FIXED RATE on this swap.

Semi-annual swap rate: Answer
%

Annualised swap rate : Answer
%

Enter your answer as a percentage, rounded to two decimal places (e.g., 9.87).

Question 2

Assume that the semi-annual fixed or swap rate is 2.00% and calculate the FIXED RETURN (total of discounted payments) by completing the following table:

1st payment (020 days): 997000

2nd payment (200 days): Answer

3rd payment (380 days): Answer

4th payment (560 days): Answer

Notional amount:        Answer

TOTAL (FIXED RETURN):   Answer

Round every input to the nearest Rand value if required (e.g., 1234567).

Question 3

Calculate the value of the equity payment or EQUITY RETURN.

Equity return: Answer

Round your answer to the nearest R100 (e.g., 1234500).

Question 4

Determine the MARKET VALUE of a swap to pay the fixed return and receive the equity return.

Answer rating: 100% (QA)

To calculate the semiannual and annualized fixed rate for the equity swap well first calculate the present value of the fixed payments and the present value of the floating payments at the beginning o... View the full answer