Answer: A pay-equity, receive-fixed swap

## Explanation Let's analyze each swap position when the equity index return is -5%: **A. Pay-equity, receive-fixed swap:** - Pays: Equity return = -5% (receives payment since return is negative) - Receives: Fixed rate (positive) - Net cash flow: Receives equity payment + receives fixed = Positive cash flow **B. Pay-equity, receive-floating swap:** - Pays: Equity return = -5% (receives payment since return is negative) - Receives: Floating rate (positive) - Net cash flow: Receives equity payment + receives floating = Positive cash flow **C. Receive-equity, pay-floating swap:** - Receives: Equity return = -5% (pays since return is negative) - Pays: Floating rate (positive) - Net cash flow: Pays equity payment + pays floating = Negative cash flow **Analysis:** - For options A and B, the party is paying the equity return. When the equity return is negative (-5%), this means they actually receive a payment from the counterparty. - For option C, the party is receiving the equity return. When the equity return is negative (-5%), this means they must pay the counterparty. Therefore, the holder of a **receive-equity, pay-floating swap** (option C) will incur a negative cash flow because: 1. They must pay the negative equity return to the counterparty 2. They also pay the floating rate Both payments result in negative cash flow. **Correct Answer: C** The party receiving the equity return bears the risk of negative equity performance, as they must pay when the equity return is negative.

Author: LeetQuiz Editorial Team