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.

Question

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.

Quizplus · Accepted Answer

The theoretical fair swap spread is zero because the present value of the fixed notional equity payments should equal the present value of the floating interest rate payments.

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