1. Describe the standard features of an equity swap contract. What
are the di erences between an equity swap and an interest-rate swap?
2. If you were a fund manager with special expertise in the mortgage
markets but were advertising yourself as an equity index fund, explain how you
might be able to generate extra returns (alpha) for the fund from your
expertise in mortgage trading.
3. A market timer switches between stock and cash (i.e., Libor)
depending on which market is expected to perform better. If you are a
market-timing investment manager, explain how you would use equity swaps to
time the market.
4. Why are cash- ows from equity swaps more volatile than from
interest-rate swaps?
5.
What is the interest-rate sensitivity of an equity for Libor swap?
.
6.
How would you synthesize an equity swap using bonds and futures?
7.
State one example of a case when you would want to implement a
Sundaram
& Das: Derivatives – Problems and Solutions . . . . . . . . . . . . . . . .
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(a)
A xed interest rate versus
equity swap.
(b)
A oating interest rate
versus equity swap.
8.
Explain why, in a oating interest rate versus equity swap with a
xed notional principal, all cash ows on the equity side of the swap after the
next settlement date have no risk.