why would anyone enter into a receive libor/pay equity index return swap? Isn’t the expected return completely different for the legs?
in short risk.
your question is like asking why would anyone own a bond rather than a stock given the relative expected returns.
it could also be due to a viewpoint on relative valuation.
or for tax reasons.
but the most direct comparison given your focus/ concern with expected return is the first.
From how I remember it being presented in the curriculum, these swaps are typically used in portfolios to lower existing beta exposure to equities. The benefit is you can effectively remove beta exposure without realizing any tax consequences which would have alternatively been realized if you instead sold the equity holdings outright to achieve exposure reduction.
I think the swap diagrams within the text are helpful for picturing this. You pay positive/receive negative returns on the equity index/reference security, which neutralizes the returns you’re realizing in your actual equity holdings, and the net transaction is essentially paying LIBOR.
But of course in the same way they can be helpful for adding exposure to equities. Being the equity receiver/Libor payer is basically borrowing at Libor and purchasing equities. Here again the benefit is that you don’t need to free up anywhere near the amount of cash in the portfolio to gain this exposure, compared to buying the equities outright.
Also, these transactions might be made to tactically alter a portfolio’s exposure for only a short period of time, which the flexibility of customizing the swaps maturity is another great feature.
Might be more than you cared to read, but hope some of it was useful.
1 Like
แน่นอนในลักษณะเดียวกับที่พวกเขาสามารถเป็นประโยชน์สำหรับการเพิ่มการสัมผัสกับหุ้น เป็นผู้ถือหุ้น / Libor payer โดยทั่วไปจะยืมที่ Libor และซื้อหุ้น ที่นี่อีกครั้งประโยชน์คือคุณไม่จำเป็นต้องเพิ่มขึ้นที่ใดก็ได้ใกล้ปริมาณเงินสดในพอร์ตโฟลิโอที่จะได้รับการสัมผัสนี้เมื่อเทียบกับการซื้อหุ้นทันที <!–td {border: 1px solid #ccc;}br {mso-data-placement:same-cell;}–> สมัครufabet
Agree with above. Another tidbit I remember from the curriculum, was that they can also be used to synthetically alter a portfolios allocation. Say you are overexposed to equity, your SAA is 50/50 E/B but you’re currently at 60/40. You can swap the return for 10% of your equity for the return on a bond, and you’ve synthetically re-balanced back to 50/50 exposure without triggering any taxable events.