Total return equity swap

CFA Level III Portfolio Management
#1

Hi guys,

I searched through Investopedia and find a simialr concept presented in whcih:

The concentrated asset position client will give to the brokerage any appreciation of the asset while the brokerage provides to client mark up for any losses and a LIBOR based benchmark return. Thus, the credit risk is then shared between the two party and the concentrated position is therefore able to monitize its concentrated position and obtain a high LTV loan as the downside risk is mitigated.

Is my understanding correct?

Thanks in advance.

#2

When using the total return equity swap, the credit (counterparty) risk of the position is on the person who is holding the concentrated position. If the equity you are holding appreciates, then you transfer this gain to the counterparty swap holder. However if it decreases in value, the counterparty will pay you for your loss. What happen if the counterparty goes bankrupt when your holding loses value? You won’t get your money back. So the credit (counterparty) risk is not shared.

Concentrated position with TRS can be monitized because you essentially transform the concentrated position into a risk-free rate return asset (at least for most TRS, you swap the asset’s return for LIBOR + some basis point).

Hope this helps.

#3

In total return equity swap,

  1. Dealer recieves if underlying stocks appreciate
  2. Investors recieves if underlying register any loss + one month LIBOR (floating rate)

Please correct if i am wrong.

Thanks in advance.