A diversified portfolio with a market value of $800000000 currently has the fo

A diversified portfolio with a market value of $800000000 currently has the following allocations:

Equity

80 percent

$640000000

Bonds

20 percent

$ 160000000

The equity portion of the portfolio is allocated as follows:

U.S. large-cap stocks

70 percent

$44800000

International stocks

30 percent

$192000000

The bond portion of the portfolio is allocated as follows:

U.S. government bonds

80 percent

$128000000

U.S corporate bonds

20 percent

$32000000

The portfolio manager wishes to change the overall allocation of the portfolio to 75

percent equity and 25 percent bonds. Within the equity category the new allocation is

to be 75 percent U.S. large cap and 25 percent international stocks. In the bond category the new allocation is to be 75 percent U.S. government bonds and
25 percent U.S. corporate bonds. The manager wants to use four-year swaps to achieve the desired allocations with settlements at the end of each year.
Assume that the counterpart~ payments or receipts are tied to LIBOR. Use generic stock or bond indices where appropriate. Indicate how the manager can use
swaps to achieve the desired allocations. Construct the most efficient overall swap in which all equivalent but opposite LIBOR payments are consolidated.