An equity swap can be used to transfer both the credit risk and the market risk of an underlying asset. Equity swaps can be also used to avoid transaction costs (including Tax), to avoid locally based dividend taxes, limitations on leverage (notably the US margin regime) or to get around rules governing the particular type of investment that an institution can hold. Equity swaps can make investment barriers vanish and help an investor create leverage. This presentation gives an introduction to equity swap product and valuation. You can find more details at http://www.finpricing.com/lib/EqSwap.html
<p>Equity Swap Definition
and Valuation
John Smith
FinPricing
Equity Swap
Summary
Equity Swap Introduction
The Use of Equity Swap
Valuation
Practical Guide
A Real World Example
Equity Swap
Equity Swap Introduction
An equity swap is an OTC contract between two parties to exchange a set
of cash flows in the future. Normally one party pays the return based on
capital gains and dividends realized on an equity security and the other
party pays the return based on a floating interest rate plus a spread.
The party receiving the equity returns gains exposure to the performance
of the reference equity without actually owning the equity; hence this
instrument can be used to obtain a leveraged exposure.
On the other hand, the party receiving payments based on the reference
rate receives protection against a loss in the value of the underlying equity.
Unlike other swap types, the equity swap notional resets on each cash flow
reset date, depending on the performance of the underlying asset.
Equity Swap
The Use of Equity Swap
Equity swaps allow parties to potentially benefit from returns of an equity
security without the need to own its shares.
A party enters an equity swap with the objective of either obtaining return
exposure or hedge existing equity risk for a period of time.
An equity swap can be used to transfer both the credit risk and the market
risk of an underlying asset.
Equity swaps can be also used to avoid transaction costs (including Tax), to
avoid locally based dividend taxes, limitations on leverage (notably the US
margin regime) or to get around rules governing the particular type of
investment that an institution can hold.
Equity swaps can make investment barriers vanish and help an investor
create leverage.
Equity Swap
Valuation
There are two legs in an equity swap: an equity leg and a floating interest
leg.
The payoff for both legs could be set at every reset date or at maturity; or
could be one side at maturity and the other at eve