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NEW QUESTION: 1
A brokerage firm, which has $10 million in S&P500 stocks, enters into an equity swap with a pension fund which currently has $10 million in a short term savings account earning LIBOR. If these two entities were to arrange a proper equity swap, in which payments are to be made annually, what would be the net payment for a period that saw the S&P500 net 12% and LIBOR set at 8%?
A. Brokerage firm makes a net payment of $400,000.
B. Pension plan makes a net payment of $400,000.
C. Pension plan makes a net payment of $200,000.
A proper swap would involve the brokerage firm making payments equal to S&P 500 returns in exchange for LIBOR.
Brokerage pays 12% of 10 million = $1,200,000. Pension Pays 8% of 10 million = 800,000. Net payable
(broker's perspective): $400,000
NEW QUESTION: 2
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