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

question 12

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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Definitions:

Utilitarianism

A moral philosophy that advocates for actions that maximize happiness and well-being for the majority.

Rawls

A philosopher best known for his theory of justice as fairness, which emphasizes principles of equality and liberty in organizing society.

Kant

Refers to Immanuel Kant, an 18th-century German philosopher known for his work in epistemology, ethics, and metaphysics, emphasizing duty, moral law, and the categorical imperative.

Mill

Refers to John Stuart Mill, a British philosopher and economist best known for his contributions to the philosophy of Utilitarianism and liberty.