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Answer: Receives $400,000
Compute each leg on the $10 million notional: - Receives **1.0%** of $10 million = **$100,000** - Pays the S&P 500 total return of **-3.0%** = pays **- $300,000**, which means she effectively **receives $300,000** With netting, total cash flow = **$100,000 + $300,000 = $400,000 received**.
Author: Manit Arora
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Q-178.6. Assume a portfolio manager enters into an equity swap to protect her downside on her $10 million portfolio. The notional of the equity swap is $10 million. Each quarter the portfolio manager receives 1.0% of the notional and pays the total return on the S&P 500. If, during the first quarter, the S&P 500 declines by 3.0%, and assuming netting, what is the swap cash flow to the portfolio manager?
A
Receives $400,000
B
Receives $300,000
C
Receives $100,000
D
Pays $400,000
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