Question 1

A variable notional equity swap differs from a fixed notional equity swap in that

Accepted Answer

In a variable notional equity swap, the principal amount changes from period to period based on the realized returns on the underlying equity or equity index. This is different from a fixed notional equity swap where the principal amount remains constant throughout the swap. The other options (A, C, D) do not accurately describe a variable notional equity swap.

Question 2

It is March 15,and the next payment date in an equity swap is September 15.You contract through an equity swap ($100,000 notional)to receive Libor and pay the equity return.Libor payments use the money market convention,i.e. ,ACT/360.Suppose the equity index goes from 1011 to 1088 over this period.The six-month Libor on March 15 is 3%.What is your net cashflow on September 15?

Accepted Answer

C

Question 3

Executive compensation often comprises stock options.These options have vesting periods,and may not be exercised for a while.Which of the following actions could help executives mitigate the risk of their stock option grants?

Accepted Answer

Shorting the broad market index,either directly or using calls,will help eliminate the "systematic" component of exposure tot he company's stock price.(That is,if the company's share price were to fall because of a fall in the broad market,there would be protection. )

Question 4

You enter into an equity swap where you receive the US dollar return on the Nikkei index at prevailing exchange rates,and pay dollar Libor.Which of the following statements is most valid?

Accepted Answer

In the other three choices even if the Nikkei were fully predictable,the equity leg returns might still be exposed to exchange-rate risk because they would depend on the exchange rate on each payment date.

Question 5

Which of the following factors does affect the valuation of a fixed notional equity swap that pays the equity return in exchange for a fixed interest rate payment?

Accepted Answer

The valuation of a fixed notional equity swap is primarily affected by the interest-rate term structure, as it determines the present value of the fixed interest payments. Expected equity price growth and interest rate volatility structure do not directly affect the valuation of the swap.

Question 6

A fund that is all invested in U.S.equities seeks exposure to foreign equity markets.Which of the following is the most appropriate approach for the fund to take? (MSCI World is an index that tracks the performance of equity markets in 24 countries. )

Accepted Answer

Choices (b)and (c)are wrong.Choice (d)gives exposure to foreign curreny markets,but not equity markets directly.

Question 7

Consider a five-year equity swap that pays the equity return in return for six-month Libor.Which of the following statements is most valid? Assume you are at the inception of the swap.

Accepted Answer

Since we are receiving Libor,increases in interest rates drop the value of the next Libor coupon.If rates rise and the equity return also rises,then the interest rate risk is even higher,because the equity return to be paid will rise.Hence,equity exposure to interest rates increases the interest-rate risk that is already present.In other words,duration increases and will be higher than six months.The baseline duration of six months follows from the fact that the Libor leg of the swap is a floating rate note.

Question 8

An equity swap favors the party that receives the equity return and pays Libor because

Accepted Answer

The answer of An equity swap favors the party that...

Question 9

Executives are often very heavily invested in their own stock.To mitigate the effects of this concentration,which of the following actions could they take?

Accepted Answer

All the options listed are strategies that executives can use to hedge against the risk of having a large portion of their wealth tied up in their own company's stock. Equity swaps (both A and B) allow them to exchange the returns of their own stock for either a fixed return (like Libor) or the returns of a broader market index, thus diversifying their risk. Buying collars (C) is another strategy that involves purchasing put options and selling call options on their stock, which provides a range within which they can protect themselves against significant losses while also limiting potential gains.

Question 10

A US-based investor enters into an unhedged cross-currency equity swap in which he pays returns on the S&P 500 index in dollars in exchange for receiving the returns on the FTSE 100 in pounds.At inception,the notional principal on the swap is $100 million,and the exchange rate is $1.60 = 1.Cash flows are exchanged every six months and the first six-month period has 182 days in it.At the end of the first six-month period,the raw returns on the S&P 500 are 8% and the raw returns on the FTSE 100 are 9%.The exchange rate at this point is $1.50 = 1.The investor's net cash flow on this first payment date is $£$

Accepted Answer

The investor receives the return on the FTSE 100 in pounds and pays the return on the S&P 500 in dollars. The return on the FTSE 100 is 9% of the notional principal of $100 million, converted to pounds at the initial exchange rate of $1.60 = £1, which equals £5.625 million. The return on the S&P 500 is 8% of the notional principal, or $8 million. This amount is then converted to pounds at the current exchange rate of $1.50 = £1, resulting in £5.333 million. The net cash flow to the investor in pounds is the difference, £5.625 million - £5.333 million = £0.292 million. However, the correct calculation involves considering the change in the value of the notional principal due to the exchange rate movement, which is not accounted for in the options provided. The correct answer involves calculating the net effect of the returns and the exchange rate change on the notional principal, which is not directly reflected in the given choices. However, based on the information provided and the typical structure of such swaps, the closest correct approach to determining the net cash flow involves the difference in returns adjusted for the exchange rate, leading to the selection of option C as the best representation of the net cash flow, despite the lack of detailed calculation to arrive directly at £0.438 million.

Question 11

Consider an equity swap of the equity index return versus six-month Libor.The current equity index is at 1100.The six-month Libor rate is currently 11.50%.There are 184 days in the given six month period.What should be the level of the index in 6 months for the net payment in six months to be zero?

Accepted Answer

For the net payment in six months to be zero, the return on the equity index must equal the return from the six-month Libor rate. The six-month Libor rate is 11.50% per annum, or for six months (which is half a year), it would be 11.50% / 2 = 5.75%. To find the level of the index that would result in a 5.75% return, we calculate it as follows: 1100 * (1 + 5.75%) = 1100 * 1.0575 = 1163.25. Since the options are in whole numbers, the closest option to 1163.25 is 1165.

Question 12

An equity swap may be used to time the markets.Given a current position in a $1,000 portfolio of 80:20 (equity:bonds),suppose you expect that bonds will perform relatively better than stocks and want to change the portfolio composition to 20:80,what swap would you enter into?

Accepted Answer

To change the portfolio composition from 80:20 to 20:80, you need to reduce your equity exposure by $600 and increase your bond exposure by the same amount. By entering into an equity swap to pay the equity return and receive the bond return for a notional of $600, you effectively achieve this reallocation.

Question 13

In a fixed notional equity-for-floating interest-rate swap,the theoretical fair swap spread (the spread over Libor paid by the equity return receiver)is

Accepted Answer

In a fixed notional equity-for-floating interest-rate swap, the equity return receiver receives a fixed equity return while paying a floating interest rate based on Libor, so the theoretical fair swap spread is zero. This is because the fixed equity return and floating interest rate based on Libor are designed to be equal in value, with no additional spread required. Therefore, the correct answer is D: zero.

Question 14

Consider an equity-for-Libor swap.The swap favors the party that receives the equity return and pays Libor because

Accepted Answer

The answer of Consider an equity-for-Libor swap.The swap favors the...

Question 15

An equity swap is an agreement to

Accepted Answer

An equity swap is an agreement between two parties to exchange the returns (or cash flows) generated by a specified equity or equity index for a stream of returns generated by another equity, equity index, or a specified interest rate (e.g., Libor). In this way, one party can gain exposure to the returns generated by the other's equity holdings or the market as a whole without actually owning the underlying assets. Choice A refers to a stock swap, which is a different type of transaction. Choice B refers to a debt-for-equity swap, which is a different type of financial restructuring. Choice D refers to a type of asset swap in which Treasury bonds are exchanged for a corporate bond or a basket of bonds, which is also not the same as an equity swap.

Question 16

Which of the following is not true of hedged cross-currency equity swaps?

Accepted Answer

The statement "The hedged-cross currency equity swap pre-specifies a fixed exchange rate at which all cash flows (except the principal) will be converted into the investor's currency" is not true for hedged cross-currency equity swaps. In fact, the fixed exchange rate specified in these swaps applies to all cash flows, including the principal. Therefore, option B is not true. Option A and C are both true statements. Therefore, the correct answer is B.

Question 17

You enter into a two-year variable notional swap of equity returns for 6-month Libor with semi-annual payments on both legs.The initial swap notional is $100 million,the Libor rate at inception of the swap is 7.2%,and the realized raw equity returns during the first 6-month period is 6.3%.The first 6-month period has 183 days.The notional principal of the swap entering the second 6-month period is

Accepted Answer

The answer of You enter into a two-year variable notional...

Question 18

Executive compensation often comprises stock options.These options have vesting periods,and may not be exercised for a while.Which of the following actions might an executive take to help her mitigate the risk of her stock option grants?

Accepted Answer

Shorting the broad market index will help eliminate the "systematic" component of exposure tot he company's stock price.(That is,if the company's share price were to fall because of a fall in the broad market,there would be protection. )Executives are,for obvious reasons,prohibited from shorting their own stock or buying puts on their own stock,so (c)and (d),while effective,are not admissible.

Question 19

Which of the following factors does not affect the valuation of a variable notional equity swap that pays the equity return in exchange for Libor?

Accepted Answer

All of the given factors, namely expected equity price growth, equity volatility, and interest-rate term structure, can affect the valuation of a variable notional equity swap that pays the equity return in exchange for Libor.

Question 20

Consider a fixed notional equity-for-floating rate swap.The fair price of the swap is to exchange equity for Libor plus a spread $x$ ,where the spread $x$ is

Accepted Answer

The answer of Consider a fixed notional equity-for-floating rate swap.The...

Quiz 22: Equity Swaps

A variable notional equity swap differs from a fixed notional equity swap in that

Executive compensation often comprises stock options.These options have vesting periods,and may not be exercised for a while.Which of the following actions could help executives mitigate the risk of their stock option grants?

You enter into an equity swap where you receive the US dollar return on the Nikkei index at prevailing exchange rates,and pay dollar Libor.Which of the following statements is most valid?

Which of the following factors does affect the valuation of a fixed notional equity swap that pays the equity return in exchange for a fixed interest rate payment?

A fund that is all invested in U.S.equities seeks exposure to foreign equity markets.Which of the following is the most appropriate approach for the fund to take? (MSCI World is an index that tracks the performance of equity markets in 24 countries. )

Consider a five-year equity swap that pays the equity return in return for six-month Libor.Which of the following statements is most valid? Assume you are at the inception of the swap.

An equity swap favors the party that receives the equity return and pays Libor because

Executives are often very heavily invested in their own stock.To mitigate the effects of this concentration,which of the following actions could they take?

Consider an equity swap of the equity index return versus six-month Libor.The current equity index is at 1100.The six-month Libor rate is currently 11.50%.There are 184 days in the given six month period.What should be the level of the index in 6 months for the net payment in six months to be zero?

An equity swap may be used to time the markets.Given a current position in a $1,000 portfolio of 80:20 (equity:bonds) ,suppose you expect that bonds will perform relatively better than stocks and want to change the portfolio composition to 20:80,what swap would you enter into?

In a fixed notional equity-for-floating interest-rate swap,the theoretical fair swap spread (the spread over Libor paid by the equity return receiver) is

Consider an equity-for-Libor swap.The swap favors the party that receives the equity return and pays Libor because

An equity swap is an agreement to

Which of the following is not true of hedged cross-currency equity swaps?

Executive compensation often comprises stock options.These options have vesting periods,and may not be exercised for a while.Which of the following actions might an executive take to help her mitigate the risk of her stock option grants?

Which of the following factors does not affect the valuation of a variable notional equity swap that pays the equity return in exchange for Libor?

Consider a fixed notional equity-for-floating rate swap.The fair price of the swap is to exchange equity for Libor plus a spread $x$ ,where the spread $x$ is

Quiz 22: Equity Swaps

A variable notional equity swap differs from a fixed notional equity swap in that

Executive compensation often comprises stock options.These options have vesting periods,and may not be exercised for a while.Which of the following actions could help executives mitigate the risk of their stock option grants?

You enter into an equity swap where you receive the US dollar return on the Nikkei index at prevailing exchange rates,and pay dollar Libor.Which of the following statements is most valid?

Which of the following factors does affect the valuation of a fixed notional equity swap that pays the equity return in exchange for a fixed interest rate payment?

A fund that is all invested in U.S.equities seeks exposure to foreign equity markets.Which of the following is the most appropriate approach for the fund to take? (MSCI World is an index that tracks the performance of equity markets in 24 countries. )

Consider a five-year equity swap that pays the equity return in return for six-month Libor.Which of the following statements is most valid? Assume you are at the inception of the swap.

An equity swap favors the party that receives the equity return and pays Libor because

Executives are often very heavily invested in their own stock.To mitigate the effects of this concentration,which of the following actions could they take?

Consider an equity swap of the equity index return versus six-month Libor.The current equity index is at 1100.The six-month Libor rate is currently 11.50%.There are 184 days in the given six month period.What should be the level of the index in 6 months for the net payment in six months to be zero?

An equity swap may be used to time the markets.Given a current position in a $1,000 portfolio of 80:20 (equity:bonds) ,suppose you expect that bonds will perform relatively better than stocks and want to change the portfolio composition to 20:80,what swap would you enter into?

In a fixed notional equity-for-floating interest-rate swap,the theoretical fair swap spread (the spread over Libor paid by the equity return receiver) is

Consider an equity-for-Libor swap.The swap favors the party that receives the equity return and pays Libor because

An equity swap is an agreement to

Which of the following is not true of hedged cross-currency equity swaps?

Executive compensation often comprises stock options.These options have vesting periods,and may not be exercised for a while.Which of the following actions might an executive take to help her mitigate the risk of her stock option grants?

Which of the following factors does not affect the valuation of a variable notional equity swap that pays the equity return in exchange for Libor?

Consider a fixed notional equity-for-floating rate swap.The fair price of the swap is to exchange equity for Libor plus a spread xxx ,where the spread xxx is

Consider a fixed notional equity-for-floating rate swap.The fair price of the swap is to exchange equity for Libor plus a spread $x$ ,where the spread $x$ is