You are a fund manager for high net$-$wealth clients. One of your clients expects shortterm interest rates to remain low over the coming year and expects equities to offer a significantly higher return. The investor wants to shift some funds from cash to equities. The investor currently holds a portfolio of money market assets.

A$.$ Detail $3$ possible solutions available to the client to achieve her aims, along with the advantages$/$disadvantages associated with each method. One of these solutions should be a swap contract.

B$.$ The client decides to enter into a one$-$year equity swap where the counterparty agrees to pay the investor the total return to the stock index in exchange for dollardenominated Libor on a quarterly basis. The Exhibit below summarizes the mechanics of the swap assuming that on settlement date the stock index is at $640,$ dividends are $3-30$ index points each quarter, and current $90-$day Libor is $3\mathrm{.}25\%$ and the notional amount of the contract is $$1,000,000.$ Each quarter contains $91$ days.

Swap Data

$\backslash$table$[[$TIME$,$LIBOR,S&P $500],[,,],[$Settlement$,3\mathrm{.}25\%,640],[$Reset#$1,3\mathrm{.}20,645],[$Reset#$2,3\mathrm{.}10,650],[$Reset#$3,3\mathrm{.}25,640],[$Maturity$,3\mathrm{.}15,670]]$

Fill in the missing values from the cash flow schedule below:

$\backslash$table$[[$Time$,$Cash Flow Schedule,,$],[$Notional$,$Libor,Index,Dividend,Net$],[$#$1,1,000,000,8,215,7,812,5,156,4,753],[$#$2,,,,5,140,]]\backslash$table$[[$Time$,$Cash Flow Schedule,,$],[$Notional$,$Libor,Index,Dividend,Net$],[$#$1,1,000,000,8,215,7,812,5,156,4,753],[$#$2,,,,5,140,],[$#$3,,,,5,125,],[$maturity$,,,,5,109,]]$

Total incremental return

C$.$ What is the total incremental return for the above swap?

D$.$ Swaps can be viewed as an amalgamation of a number of alternate financial instruments. What type of portfolio of financial instruments is the above swap replicating? What benefits are there from using the swap over the alternative?