What is amount of payment that the two parties must make

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Reference no: EM132179913

Question - The Small Truckers Association (a pension sponsor) and the Outback Investment Management Company (an Australian asset management firm) enter into the following three-year swap with a notional amount of $80 million: every year for the next three years, the Small Truckers Association agrees to pay Outback the return realized on the S&P 500 stock index for the year minus 200 basis points and receive from Outback the annual return realized on an Australian stock market index, the S&P/ASX 200.

a. What type of swap is it?

b. In the first year payments are to be exchanged, suppose that the return realized on the S&P 500 stock index and the S&P/ASX 200 stock index is 11% and 16%, respectively. What is the amount of the payment that the two parties must make to each other?

c. Explain why this swap allows the Small Truckers Association to participate in the performance of the Australian stock market without actually inventing in any Australian stocks.

Reference no: EM132179913

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