Question

Credit Derivative. In a total return swap, Party A receives LIBOR 3%. Party B receives the total return on a certain equity index on a principal of $100,000. Suppose at swap maturity LIBOR is 5% and the index return is 6%. According to the swap, how much should Party A pay and receive

Answer 1

Based on the provisions of the swap, Party A will pay $6,000 and receive $8,000.

How much will Party A pay?

Party A will pay the total return of 6% on the equity index capital:

= 6% x 100,000

= $6,000

How much will Party A receive?

Party A is to receive the rate of LIBOR + 3%. LIBOR is 5% so Party A will receive:

= 5% + 3%

= 8%

Total return is:

= 8% x 100,000

= $8,000

In conclusion, Party A will pay $6,000 and receive $8,000.

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