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.
A) The interest-rate duration of the swap is five years.
B) The interest-rate duration of the swap is six months irrespective of the correlation between interest rates and equity returns.
C) The interest-rate duration of the swap is greater than six months if the equity return is positively correlated with interest rates.
D) The interest-rate duration of the swap is greater than five years if the equity return is negatively correlated with interest rates.

Question

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. 
A) The interest-rate duration of the swap is five years.
B) The interest-rate duration of the swap is six months irrespective of the correlation between interest rates and equity returns.
C) The interest-rate duration of the swap is greater than six months if the equity return is positively correlated with interest rates.
D) The interest-rate duration of the swap is greater than five years if the equity return is negatively correlated with interest rates.

Quizplus · Accepted Answer

The Answer is C

Consider a Five-Year Equity Swap That Pays the Equity Return