Question: Suppose the risk-free interest rate is 3% and the equilibrium expected total return risk premium on property investments is 3.5% (hence, equilibrium expected total return on real estate investment is 6.5%). What will be the equilibrium (bid-ask spread midpoint) price (fixed-leg rate) for a real estate index total return swap:
(a) If the underlying index is in equilibrium (no lag effect)? and
(b) If the expected average annual total return on the index during the period of the contract is 10%?