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Pricing models of equity swaps
Author(s) -
Wang MingChieh,
Liao SzuLang
Publication year - 2003
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10082
Subject(s) - foreign exchange swap , notional amount , currency , swap (finance) , portfolio , financial economics , equity (law) , economics , foreign exchange risk , business , valuation (finance) , monetary economics , finance , political science , law
This article provides a generalized formula for pricing equity swaps with constant notional principal whenthe underlying equity markets and settlement currency can be set arbitrarily. To derive swap values using therisk‐neutral valuation method, the swap payment is replicated at each settlement date by constructing aself‐financing portfolio. To obtain the foreign equity index return denominated in the domestic or in athird currency, equity‐linked foreign exchange options are used to hedge the exchange rate risk. It isfound that if the swap involves international equity markets, then the swap value contains an extra term whichreflects the currency hedging costs. This methodology can easily be applied to price various types of equityswaps simply by modifying the specifications of the model presented here as required. © 2003 WileyPeriodicals, Inc. Jrl Fut Mark 23:751–772, 2003