Is an interest rate swap a total return swap?

A total return swap is a derivative contract where one counterparty pays sums based on a floating interest rate, for example Libor plus a given spread, and receives payments based on the return of a reference asset such as a bond, stock or equity index.

Is a total return swap a credit derivative?

In a very important sense, TRS are not credit derivatives. TRS, considered in their most basic form, are funding cost arbitrages. TRS are applied in a variety of ways: balance sheet management, portfolio management, hedge fund leverage, and asset swap maturity manipulation.

How do hedge funds use total return swaps?

Hedge funds use Total Return Swaps to obtain leverage on the Reference Assets: they can receive the return of the asset, typically from a bank (which has a funding cost advantage), without having to put out the cash to buy the Asset. They usually post a smaller amount of collateral upfront, thus obtaining leverage.

How does a total return swap differ from a credit default swap?

Credit default swaps differ from total return swaps in that the investor does not take price risk of the reference asset, only the risk of default. The investor receives a fee from the seller of the default risk. The investor makes no payment unless a credit default event occurs.

How does a pure credit swap differ from a total return swap?

The total return swap encompasses an allowance of interest rate risk which is not included in the pure credit swap contracts. In the pure credit swap there is a fixed rate of payment which is not the case in the total return swap.

When a financial institution hedges the interest rate risk for a specific asset the hedge is called a?

(e) both the securities and the futures contracts decrease in value. Answer: A. Question Status: New. 46) When a financial institution hedges the interest-rate risk for a specific asset, the hedge is called a (a) macro hedge.

What is a credit total return swap?

A total return swap (TRS), sometimes known as a total rate of return swap or TR swap, is an agreement between two parties that exchanges the total return from a financial asset between them. This is designed to transfer the credit risk from one party to the other.

Is a total return swap an OTC derivative?

A TRS is an OTC contract, which captures the agreement between two parties to exchange the total return of an asset.

How swaps are used to manage risks?

Swaps can be used to lower borrowing costs and generate higher investment returns. Swaps can be used to transform floating rate assets into fixed rate assets, and vice versa. Swaps can transform floating rate liabilities into fixed rate liabilities, and vice versa.

https://www.youtube.com/watch?v=SxJ0lu4seDs