A portfolio manager enters into an equity swap with a swap dealer. The portfolio manager agrees to pay the return on the Value Index and receive the return on the Growth Index. The swap's notional principal is $50 million, and the payments will be made semi-annually. The levels of the equity indices are as follows:
| Index | Level at Start of Swap | Level Six Months Later |
| Value Index | $5,460 | $5,350 |
| Growth Index | $1,190 | $1,200 |
The net amountowedtothe portfolio manager aftersix monthsis closest to:
The portfolio manager pays the Value Index return, which had a loss, and receives the Growth Index, which had a gain during the period. Therefore, the portfolio manager will receive a cash flow from the swap dealer.
Value Index payment = [(5,350/5,460) － 1] × $50,000,000 = ﹣$1,007,326.
Growth Index payment = [(1,200/1,190) － 1] × $50,000,000 = $420,168.
Net payment to portfolio manager = $420,168 － (﹣$1,007,326 = $1,427,494.