Income securities-increase exposure to large-cap stocks

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An asset manager wishes to reduce his exposure to fixed-income securities and increase his exposure to large-cap stocks. He seeks to do so using an equity swap. He agrees to pay a dealer the fixed rate of 4.5% and the dealer agrees to pay the manager the return on a large-cap index. For each of the scenarios listed below, calculate the overall payment 6 months later and indicate which party makes the payment. Assume that payments are made semi-annually (180 days per period) and there are 365 days in a year. The notional principle is $25 million.

a. The value of the large-cap index starts off at 578.50 and six months later is at 622.54

b. The value of the large-cap index starts off at 578.50 and six months later is at 581.35

Reference no: EM131925322

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