Case Studies in Financial Engineering

CASO 5

SWAPS+

July 2012

SWAPS+

Fidelix Insurance Company owns a North-American Shares portfolio with the

following securities:
Deal
Company
WALT DISNEY-DISNEY CO (DS: 921964 /
ISIN: US2546871060)
GAP INC (DS:951018 / ISIN: US3647601083)
ITT CORPORATION (DS: 906174/
ISIN:US4509111021)
KELLOGG CO (DS:905922/
ISIN:US4878361082)
MICROSOFT CP (DS: 719643 / ISIN:
US5949181045)

Currency

Date

No.
Securities

US $

01-Feb-07

1.500.000

US $

01-Feb-07

250.000

US $

01-Feb-07

800.000

US $

01-Feb-07

500.000

US $

01-Feb-07

1.300.000

As the Board perspectives on the future equity market behaviour are pessimistic, given
that the company owns other portfolios with European and other securities, it was
decided, in an investment committee held in Sep.09, to trade swap contracts in order to
swap the variable return from the US securities by a fixed return or a variable one from
an European index.
Assume you are a financial analyst in Fidelix and were selected to implement this
strategy. After contacting several financial institutions, you decided to propose the trade
of the following swaps:
a) A 3-year swap in which the company will pay the variable income obtained from
Walt Disney shares and will receive the 3-month EURIBOR -0,3% per annum,
corresponding the notional to the market value of Walt Disney shares on the 30th June
2007. The payments occur on a quarterly basis (at the end of the quarter) and the
contract starts on the 30 June 2007.
b) A 3-year swap in which the company will pay the variable income obtained from
Microsoft shares and will receive the FTSE 100 return. The contract start on the 30 June
2007 and the notional value corresponds to the market value of those shares on the same
day. Payments are biannual (at the end of each half year).
c) A 3-year swap in which the company will pay the variable income obtained from ITT
Shares and will receive a fixed rate of 4,5%/year. The contract starts on the 30th June
2007 and the notional value corresponds to the market value of those shares on the same
day. Payments are made on an yearly basis (at the end of the year).
Please answer to the following questions:
1) Compute the value of the swaps portfolio on the 31st Dec. 2009.

2) Compute the value of the aggregate portfolio on the 31st Dec. 2009.
3) Considering historical prices and the variance-covariance matrix, assuming that
the correlation between fixed or variable interest rates and the FTSE 100 index
is nil, determine whether risk mitigation occurred after the swaps were traded.
4) A financial institution proposed to Fidelix and ZZX the following yearly interest
rates to a 3-year loan of 100 million Euros:
Company

Fixed rate

Floating rate

Fidelix

4%

EURIBOR+0,5%

ZZX

2%

EURIBOR+0,2%

Fidelix intends to obtain a fixed rate loan and ZZX intends to obtain a floating rate loan.
The financial institution is expecting to get a profit of 0,2% (per annum) acting as an
intermediary. Present a swap equally advantageous for both companies, compute the
interest rates (after swap) to be paid by Fidelix and ZZX and represent graphically the
interest rates paid and received by each company in the swap.