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Pricing models of equity swaps

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  • Ming‐Chieh Wang
  • Szu‐Lang Liao

Abstract

This article provides a generalized formula for pricing equity swaps with constant notional principal when the underlying equity markets and settlement currency can be set arbitrarily. To derive swap values using the risk‐neutral valuation method, the swap payment is replicated at each settlement date by constructing a self‐financing portfolio. To obtain the foreign equity index return denominated in the domestic or in a third currency, equity‐linked foreign exchange options are used to hedge the exchange rate risk. It is found that if the swap involves international equity markets, then the swap value contains an extra term which reflects the currency hedging costs. This methodology can easily be applied to price various types of equity swaps simply by modifying the specifications of the model presented here as required. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:751–772, 2003

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  • Ming‐Chieh Wang & Szu‐Lang Liao, 2003. "Pricing models of equity swaps," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 23(8), pages 751-772, August.
    • Handle: RePEc:wly:jfutmk:v:23:y:2003:i:8:p:751-772
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    Cited by:

    1. Ting‐Pin Wu & Son Nan Chen, 2007. "Equity swaps in a LIBOR market model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 27(9), pages 893-920, September.
    2. Ravi Kashyap, 2019. "Concepts, Components and Collections of Trading Strategies and Market Color," Papers 1910.02144, arXiv.org, revised Jan 2020.

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