Swap Question

[pierovic18]

Consider 1 year quarterly pay 1000 equity swap based on 90 day libor and the index returns. the setlements days are as follow:
Q1 Libor 3.2 Index 881
Q2 Libor 3 Index 850
Q3 Libor 3.4 index 892.5
Q4 Libor 3.9 index 900
The final setlment day, the quity returns payer will:

Answer:
0.034(90/360)-(900/895.5-1) 1000


the 90/360 is because it is quarterly or because it is based on 90 days libor????

 

[lev]

B/c it is a quarterly settlement. You use the 3.4% in calculation of the return because it is 90-day LIBOR. Had it been a 180-day LIBOR, you would have used 3%.

By the way, the calculation should be.

(0.034 - 0.0084) x (90/360) x 1000.

 

[pierovic18]

I THINK YOU ARE WRONG...0.0084 SHOULD NOT BEING MULTIPLIED BY 0.25

 

[lev]

Yes it should. 90-Day LIBOR is quoted on annual basis.

 

[Dermot81]

Yes the 90 day LIBOR is quoted on an annual basis, but the equity swap isn't.

Therefore I think the poster had the correct formula, since it wouldn't make any sense to multiply the equity part [(900/895.5)-1] of the swap, which is already given in quarters, by .25 (90/360).

 

[lev]

You are right, I am sorry.