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Pricing models of equity swaps

✍ Scribed by Ming-Chieh Wang; Szu-Lang Liao

Publisher: John Wiley and Sons
Year: 2003
Tongue: English
Weight: 196 KB
Volume: 23
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.10082

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✦ Synopsis

Abstract

This article provides a generalized formula for pricing equity swaps with constant notional principal when
the underlying equity markets and settlement currency can be set arbitrarily. To derive swap values using the
risk‐neutral valuation method, the swap payment is replicated at each settlement date by constructing a
self‐financing portfolio. To obtain the foreign equity index return denominated in the domestic or in a
third currency, equity‐linked foreign exchange options are used to hedge the exchange rate risk. It is
found that if the swap involves international equity markets, then the swap value contains an extra term which
reflects the currency hedging costs. This methodology can easily be applied to price various types of equity
swaps simply by modifying the specifications of the model presented here as required. © 2003 Wiley
Periodicals, Inc. Jrl Fut Mark 23:751–772, 2003

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