What Is An Equity Swap Agreement

Third, the investment manager can eliminate its exposure to fluctuations in the Korean won (the South Korean currency) by requiring that all cash flows be denominated in U.S. dollars. It pays a money market price in U.S. dollars (minus a spread) on the U.S. dollar in exchange for cash flow from U.S. dollar equities. If he had bought the various South Korean stocks, he would own a South Korean won asset whose value of the U.S. dollar would be vulnerable to the combination of monetary devaluation (or excessive devaluation) and a merger of the core of the stock markets. That is exactly what happened in 1998. On the other hand, Investor B holds a long position in ABC Corp. shares.

Investor B believes that the company`s share price will be volatile in the short term, so he wants to hedge the potential risk of a price drop. Fund A and Investor B can enter into a share exchange agreement between them in order to achieve their respective objectives. The swap will include the exchange of future cash flows. Stock swets are used to exchange returns on an equity or equity index with another cash flow (fixed interest rate/reference rate such as work/or return on another index or stock). It can be used to gain commitment in a stock or index without actually owning the stock. It can also be used to hedge equity risk in times of negative return environment and is also used by investors to invest in a wider range of securities. One way to circumvent these restrictions is by purchasing a U.S. RRSP-enabled equity fund. How do these funds retain their right to RRSP while providing the performance of U.S.

equity funds? Using equity swetons acquired by Canadian banks, the funds are considered to be invested in Canadian investment products. Equity exchange pays the funds the total return on the U.S. stock market (including currency movements, depending on the fund`s structure). Equity swaps are powerful tools in the hands of the passive investment manager, the investor who wants to adapt the timing of his tax events, investment managers looking for opportunities abroad and the average investor who wants to improve his return despite the letter of the government`s reserves.

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