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?
A) An equity swap to receive the equity return and pay the bond return for a notional of $1,000.
B) An equity swap to pay the equity return and receive the bond return for a notional of $1,000
C) An equity swap to receive the equity return and pay the bond return for a notional of $600.
D) An equity swap to pay the equity return and receive the bond return for a notional of $600

Question

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? 
A) An equity swap to receive the equity return and pay the bond return for a notional of $1,000.
B) An equity swap to pay the equity return and receive the bond return for a notional of $1,000
C) An equity swap to receive the equity return and pay the bond return for a notional of $600.
D) An equity swap to pay the equity return and receive the bond return for a notional of $600

Quizplus · Accepted Answer

The Answer is D

An Equity Swap May Be Used to Time the Markets