total return swaps

Question 1

definition

Answer 1

• one party (the total return receiver) receives the total return of a reference asset
• the other party (the total return payer) receives a fixed or floating rate cash flow.

Question 2

what are the three parts / parties that make it up

Answer 2

Reference Asset: The asset can be any financial instrument, such as an equity, bond, or index.
Total Return Receiver: Gets all income (interest/dividends) and capital gains from the reference asset.
Total Return Payer: Pays a fixed or floating rate to the receiver and gets the total return of the asset (interest, dividend

Question 3

uses

Answer 3

Credit Risk: The risk that the counterparty may default on its obligations.
Market Risk: The risk that the value of the reference asset may decline.
Liquidity Risk: TRS contracts may be less liquid than underlying assets.