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On December 2, the manager of a tactical asset allocation fund




5. On December 2, the manager of a tactical asset allocation fund that is currently invested;entirely in floating-rate debt securities decides to shift a portion of her portfolio to equities.;To effect this change, she has chosen to enter into the ?receive equity index? side of a;one-year equity swap based on movements in the S&P 500 Index plus a spread of 10 basis;points. The swap is to have quarterly settlement payments, with the floating-rate side of;the agreement pegged to three-month LIBOR denominated in U.S. dollars. At the origination;of the swap, the value of the S&P 500 Index was 463.11 and three-month LIBOR was;3.50 percent. The notional principal of the swap is set for the life of the agreement at $50;million, which matches the amount of debt holdings in the fund that she would like to;convert to equity.;a. Calculate the net cash receipt or payment?from the fund manager?s perspective?on;each future settlement date, assuming the value for the S&P 500 index (with all dividends;reinvested) and LIBOR are as follows;Settlement Date Number of Days S&P Level LIBOR Level;December 2 (initial year) ? 463.11 3.50%;March 2 (following year) 90 477.51 3.25;June 2 92 464.74 3.75;September 2 92 480.86 4.00;December 2 91 482.59 ?;b. Explain why the fund manager might want the notional principal on this swap to vary;over time and what the most logical pattern for this variation would be


Paper#21234 | Written in 18-Jul-2015

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