In a Fixed Notional Equity-For-Floating Interest-Rate Swap, the Theoretical Fair

question 20

Multiple Choice

In a fixed notional equity-for-floating interest-rate swap, the theoretical fair swap spread (the spread over Libor paid by the equity return receiver) is

• A) Greater than zero because equity returns are generally higher than Libor rates.
• B) An increasing function of equity market volatility.
• C) A decreasing function of expected equity market returns.
• D) Zero.

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