Consider a Fixed Notional Equity-For-Floating Rate Swap $x$ ,Where the Spread $x$

question 6

Multiple Choice

Consider a fixed notional equity-for-floating rate swap.The fair price of the swap is to exchange equity for Libor plus a spread $x$ ,where the spread $x$ is

• A)Greater than zero if the Libor payer has a lower rating than the equity return payer.
• B)Greater than zero if the equity return payer has a lower rating than the Libor payer.
• C)Always less than zero because the Libor leg has lower volatility than the equity leg.
• D)Zero regardless of credit rating considerations.

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