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.