Pricing and Valuing Equity Swaps
Three common types of equity swaps are:
Pay Fixed Interest Rate, Receive Return on Equity
Pay Floating Interest Rate, Receive Return on Equity
Pay Return on One Equity, Receive Return on a Different Equity
Pricing Equity Swaps
The same formula used to find the fixed interest rate when pricing a plain vanilla interest rate swap or a currency swap to obtain an initial swap value of zero is applied.
The market value of a pay floating-receive return on equity swap is automatically zero at swap initiation since the floating rate portion of the swap equals 1.0 (making the numerator of the rate pricing equation zero, because it is 1 minus 1).
Pricing an equity for equity swap can be done by going long on one stock and short on the other. Like other swaps, this swap is valued at zero on initiation.
- Valuing Equity Swaps
The market value of an equity swap at any day "t"
\= (St/S0) - Bt(hn) - (FS(0,n,m)*ΣBt(hj))
- St = stock (or index) price at time t
- S0 = stock (or index) price at time 0
- Bt(hn) = present value of $1 to be repaid at swap's expiry time "n"
- FS(0,n,m) = fixed rate on the swap
- Bt(hj) = present value factor for each interest rate payment, based on the current structure of interest rates; these are calculated at time t and summed.
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- CFA Level 2: Derivatives Part 2 – Introduction
- Introduction to Options
- Synthetic Options and Rationale
- One Period Binomial Option Pricing Model
- Call Option Price Formula
- Binomial Interest Rate Options Pricing
- Black-Scholes-Merton (BSM) Option Pricing Model
- Black-Scholes-Merton Model and the Greeks
- Dynamic Delta Hedging & Gamma Related Issues
- Estimating Volatility for Option Pricing
- Put-Call Parity for Options on Forwards
- Introduction to Swaps
- Plain Vanilla Interest Rate Swap
- Equity Swaps
- Currency Swaps
- Swap Pricing vs. Swap Valuing
- Pricing and Valuing a Plain Vanilla Interest Rate Swap
- Pricing and Valuing Currency Swaps
- Pricing and Valuing Equity Swaps
- Swaps as Theoretical Equivalents of Other Derivatives
- Swaptions and their Valuation
- Swap Credit Risk and Swap Spread
- Interest Rate Derivatives - Caps and Floors
- Credit Default Swaps (CDS)
- Credit Derivative Trading Strategies