Description:-
In Equity Swap/Total Return Swap/Portfolio Swap/Basket Swap, two parties make a series of payments to each other with at least one set of payments determined by a stock or index return. The other set of payments can be a fixed or floating rate or the return on another stock or index. Equity or Total return swaps are used to substitute for a direct transaction in stock. It also presents and illustrates formulas for pricing and valuation and provides empirical evidence comparing the performance of equity swaps against comparable strategies involving direct investment in equity.
The return is calculated based on a given notional principal and may or may not include dividends. The payments occur on regularly scheduled dates over a specified period of time.
Equity swap allows the buyers to only receive the difference in price movements of the stock, index or portfolio. Total return swap allows the buyer to receive the price movements along with the dividends or any other corporate actions on stock, index or portfolio.
Equity Swap – underlying is single equity.
Portfolio Swap – underlying is a customized basket of equities.
Basket Swap – underlying is an index.
Why are they traded?
An Equity or Total return swap allows investors the ability to hedge the risk of their equity portfolios or speculate on the direction of equity prices with limited risk. These swaps are popular with hedge funds because they get the benefit of a large exposure with a minimal cash outlay.
Life cycle events: –
Interest and financing leg.
OTCWIRE 