Find the Approximate Upcoming Net Payment on an Equity Swap

question 4

Multiple Choice

Find the approximate upcoming net payment on an equity swap in which party A pays the return on stock index 1 and party B pays the return on stock index 2.The notional amount is $25 million.Stock index 1 starts the period at 1500 and goes up to 1600 at the end of the period.Stock index 2 starts the period at 3500 and goes up to 3300 at the end of the period.

• A)The party paying index 1 pays about $238,000
• B)The party paying index 2 pays about $238,000
• C)The party paying index 2 pays about $3.095 million
• D)The party paying index 1 pays about $25 million
• E)The party paying index 1 pays about $3.095 million

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Definitions:

Accounts Payable Period

The average time it takes for a business to pay off its suppliers and vendors.

Liquidity Reserves

Liquid assets held by an entity as a buffer against future contingencies or unforeseen expenses.

Operating Cycle

The average period between purchasing or acquiring inventory and receiving cash from sales of the inventory, critical for managing company liquidity.

Cash Cycle

The time period between the outlay of cash for the purchase of inventory and the collection of cash from customers for the sale of that inventory.