An Equity Swap May Be Used to Time the Markets

question 19

Multiple Choice

An equity swap may be used to time the markets. Given a current position in a $1,000 portfolio of 80:20 (equity:bonds) , suppose you expect that bonds will perform relatively better than stocks and want to change the portfolio composition to 20:80, what swap would you enter into?

• A) An equity swap to receive the equity return and pay the bond return for a notional of $1,000.
• B) An equity swap to pay the equity return and receive the bond return for a notional of $1,000
• C) An equity swap to receive the equity return and pay the bond return for a notional of $600.
• D) An equity swap to pay the equity return and receive the bond return for a notional of $600

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Definitions:

Y-intercept

The point at which a line or curve crosses the y-axis of a graph, indicating the value of the dependent variable when the independent variable is zero.

Exponentially Distributed

Defines a continuous probability distribution frequently utilized to represent the duration between independent events occurring at a stable average pace.

Light Bulb

An electric device that produces light by the flow of electrical current, typically consisting of a filament or LED that glows when heated.

Exponential Distribution

A probability distribution that describes the time between events in a Poisson point process, representing the times between events in a homogeneously random process.