Equity Swaps Explained: Pricing and Valuation | CFA Level 2

[@x6011]

I still don't get it how to change the uncertain Re to a certain NP? can you please give more explanation? thank you !

[@remlatzargonix1329]

Questions: Q1) wouldn't the periodic return on equity include both the cap gain % plus the dividend yield? Q2) What happens if if the return on equity is negative?....does hedge fund have to,pay investment bank?

[@finRGB]

Hello Remlat: Q1) In this approach, we assume that the underlying either does not pay dividends, or, the dividends are reinvested back in the equity position. Q2) Yes, in that situation, the hedge fund pays to the investment bank.