Hi,For a given nominal amount two part exchange two returns (for example Nasdaq returns for S&P returns). Why the value of this contract is zero ? or is there other considerations to take in account ?

it is zero because S&P and Nasdaq returns are easy to replicate (with futures, for example).say you want to receive Nasdaq and pay S&P. The counterparty IB will short S&P (to hedge payments they are receiving from you) and go long Nasdaq (to be able to make payments to you). Nothing else is necessary. (Of course the counterparty will charge you fees or a bid/ask spread to compensate for their costs, but that is second order).

would you pay a premium to buy NASDAQ over S&P ?

I think the hedging argument works well in theory but in practice for large volume transaction is it practical ?What I mean for example if you take a country that have a huge exposure to some industry, Saudi Arabia for petroleum. Their GDP increase can be decomposed into two part the global world return on oil (the oil beta or systemic oil risk) + their comparative advantage in the industry (the alpha on how much they are skilled). Hence they can diversify the world oil exposure (they can not do anything about it even if they work hard compared to others) and swap it for "free" as acastaldo said into the world portfolio of all sectors (returns for returns) and take only care of their skills improvement.I am not sure how well this scheme works or can be put on practice ?Same for a High tech company using a swap of Nasdaq returns into DowJones or S&P.

QuoteOriginally posted by: quantiquequantI think the hedging argument works well in theory but in practice for large volume transaction is it practical ?What I mean for example if you take a country that have a huge exposure to some industry, Saudi Arabia for petroleum. Their GDP increase can be decomposed into two part the global world return on oil (the oil beta or systemic oil risk) + their comparative advantage in the industry (the alpha on how much they are skilled). Hence they can diversify the world oil exposure (they can not do anything about it even if they work hard compared to others) and swap it for "free" as acastaldo said into the world portfolio of all sectors (returns for returns) and take only care of their skills improvement.I am not sure how well this scheme works or can be put on practice ?Same for a High tech company using a swap of Nasdaq returns into DowJones or S&P.you might be confusing "valuation" and "pricing"

QuoteOriginally posted by: daveangelQuoteOriginally posted by: quantiquequantI think the hedging argument works well in theory but in practice for large volume transaction is it practical ?What I mean for example if you take a country that have a huge exposure to some industry, Saudi Arabia for petroleum. Their GDP increase can be decomposed into two part the global world return on oil (the oil beta or systemic oil risk) + their comparative advantage in the industry (the alpha on how much they are skilled). Hence they can diversify the world oil exposure (they can not do anything about it even if they work hard compared to others) and swap it for "free" as acastaldo said into the world portfolio of all sectors (returns for returns) and take only care of their skills improvement.I am not sure how well this scheme works or can be put on practice ?Same for a High tech company using a swap of Nasdaq returns into DowJones or S&P.you might be confusing "valuation" and "pricing"Well I like to understand this subtle point !

What the esteemed posters are trying to get across is that the same principles apply here as they would to any derivative pricing problem - namely, that the price or fair value is the price of the the replica, the hedge. If the price is different than the replica you have found a money machine (subject to consideration of counterparty credit risk). Please also note that certain kinds of this stuff is a tax arb that screws one or more governments out of tax revenue and shares it between the swap participants.