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?

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Quizplus · 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.

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