Equity Swaps

Equity Swaps - Equity Swaps Copyright 1998-2006 Investment...

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1 Equity Swaps Copyright © 1998-2006 Investment Analytics
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Copyright © 1998-2006 Investment Analytics Equity Swaps Slide: 2 Agenda ± Equity Swaps ± Applications ± Valuation
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Copyright © 1998-2006 Investment Analytics Equity Swaps Slide: 3 Roadmap: Equity Swaps Stock Short Put Call •Floor •Warrants •SCORES •Buy-write •Put Warrants •PRIMES OTM Call Call Spread •Collar •PERCS •SHIELDS •ELKS •DECS •PRIDES Debt •Convertibles •PENS •SUPERS •GROIS Equity Swap
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Copyright © 1998-2006 Investment Analytics Equity Swaps Slide: 4 Swaps ± What are Equity Swaps ± How they are Traded ± Swaps Markets ± Applications of Equity Swaps ± Swap Pricing
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Copyright © 1998-2006 Investment Analytics Equity Swaps Slide: 5 Swaps ± Arrangements between counter-parties to exchange ± Swap Transaction ± Principal: ± Notional (not actually exchanged) - Interest rate, Equity swaps ± Actual (principal actually exchanged) - Forex swaps ± Service Payments: ± Made at designated periods over life of swap (the “tenor”) ± One party pays fixed price (rate) - “swap coupon” ± Other party pays floating price - pegged to some floating index
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Copyright © 1998-2006 Investment Analytics Equity Swaps Slide: 6 Swap Dealer ± Matches counter-parties ± Prices swaps ± Makes market ± Acts as counter-party ± Warehouses swaps ± Trades own book ± Takes bid-offer spread
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Copyright © 1998-2006 Investment Analytics Equity Swaps Slide: 7 A Generic Swap Structure ± Counterparty A converts from fixed to floating ± Counterparty B converts from floating to fixed Swap Dealer A Fixed Price Floating Price Fixed Price B Fixed Price Floating Price Floating Price
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Copyright © 1998-2006 Investment Analytics Equity Swaps Slide: 8 Equity for Fixed Swap ± Swaps stock portfolio return for fixed income ± Hedges a stock portfolio for the tenor of the swap ± Alternative to selling index futures or shorting stock ± Index return ± S&P500, Nikkei 225, DAX, CAC-40, FT-SE 100 Swap Dealer A Fixed rate % Index return Stock Portfolio stock return
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Copyright © 1998-2006 Investment Analytics Equity Swaps Slide: 9 Equity for Fixed Swap ± Principal ± Notional Principal typically $50mm - $100mm ± Fixed over tenor of swap - “nonamortizing swap” ± Tenors 1 - 3 year typical ± Service Payments ± Service payments quarterly ± Equity return can fluctuate ± Cash flows on equity leg can be +ve or -ve ± If -ve, dealer pays this as well as swap coupon
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Copyright © 1998-2006 Investment Analytics Equity Swaps Slide: 10 Payment Calculations ± Concurrent (typical): ± Equity leg pays total return on index over current qtr ± In Arrears: ± Uses return over previous qtr to calculate payments ± First payment occurs 3 months after swap inception ± First payment known at inception ± Equity payer pays: ± NP x (R - I) / 4 ± NP = Notional principal ± R = annualized equity return ± I = Fixed interest rate per annum
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Copyright © 1998-2006 Investment Analytics Equity Swaps Slide: 11 Equity for Fixed Swap Payoff ± Equity Payer: ± Short index futures ± Long a coupon bond Equity Markets Rise Fall Interest Rates Fall Rise ++ -+ -- + -
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Equity Swaps - Equity Swaps Copyright 1998-2006 Investment...

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