Chapter 13 - Other Types of Swaps

Question 1

What is a commodity swap?

Answer 1

A swap in which one counterparty
agrees to make fixed periodic
payments to a second counterparty for
the use of a predetermined amount of
a certain commodity. Simultaneously,
the second counterparty agrees to
make periodic payments to the first
counterparty which are based on the
same amount of a certain commodity
but calculated at a floating unit price.

Question 2

What is an equity swap?

Answer 2

An equity swap effectively creates
a “synthetic” equity position. In an
equity swap, counterparty A will make
interest payments to counterparty B
calculated at a fixed rate of interest
on a notional amount of principal for
the duration of the swap. In return,
counterparty B will make payments
to counterparty A equal to the return
(or some fraction thereof) of the same
notional amount of the agreed upon
equity index.

Question 3

What is a synthetic equity position?

Answer 3

A position that allows an investor to
earn equity returns without actually
taking a position in equity.

Question 4

Explain what an equity swap is.

Answer 4

An equity swap is an agreement in which one counterparty agrees to make periodic payments at a fixed rate
of interest on a notional amount of principal for the duration of the swap. The other counterparty agrees to
make periodic payments equal to the return (or some fraction thereof) on an equity index (e.g., S&P 500,
NASDAQ 100, S&P/TSX 60) on the same notional amount of principal.
Entering into an equity swap in which the equity return is received is equivalent to a “synthetic equity” position
in the index.

Question 5

Explain what a commodity swap is.

Answer 5

A commodity swap is an agreement in which one counterparty agrees to make periodic payments based
on a fixed price to a second counterparty for the use of a predetermined amount of a certain commodity.
Simultaneously, the other counterparty agrees to make periodic payments based on a floating price to the first
counterparty based on the same amount of the same commodity.

Question 6

Explain what a synthetic equity position is and how it is created with the use of an equity swap.

Answer 6

A synthetic equity position allows an investor to earn equity returns without actually taking a position in
the equity markets. A typical equity swap would have an investor paying a fixed coupon to a counterparty in
exchange for the periodic rate of return (or some fraction thereof) on a particular equity market index such as
the S&P 500.