Cornell_Swap_Teach_In_9-21_v1

Trips allows a client to swap an interest rate based

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TRIPS allows a Client to swap an interest rate based return for the total return on an interest in a US domestic limited partnership or offshore investment company (a ‘Fund’). Enables Client to 1) diversify asset classes by obtaining economic exposure to Funds 2) create leveraged exposure to Funds In trade, which is executed under ISDA, Client posts cash or US Treasuries to secure obligations. DB pays Client the positive return on the Fund. Client pays DB any decrease in the NAV of the Fund periodically or upon maturity and LIBOR plus spread periodically on the notional amount of the TRIPS.
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2 Index Swaps Pros Liquidity: as liquid as the underlying tocks Precise index replication Rebalances handled by the counterparty (DB) Efficient capture of constituents’ lending value, especially on termed trades Control your cash collateral reinvestment risk associated with agency lending programs Customized: your choice of tenor, reset frequency, interest benchmark Outperformance: Less liquid indices often fund below Libor Cons Counterparty risk vs swap issuer on the MTM of the position (since last reset) ISDA & credit facility required Deltas tradable only during underlying market hours Best Application: long term holdings in almost any index, especially MSCIs
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2 Outperformance Available on MSCI Indices Global Indices MSCI World 37bps MSCI EAFE 21bps MSCI EAFE + Canada 19bps European Indices MSCI Europe 39bps MSCI Europe ex UK 62bps EuroStoxx 50 85bps EuroStoxx Midcap 65bps CAC 36bps DAX 5bps Emerging Indices MSCI Hungary 35bps MSCI Taiwan 40bps US Indices Russell 2000 20bps Historical levels shown here are for indicative purposes only and are subject to change.
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2 Outperformance Swap Trade Structure – GM DB: Build short inventory in hard to borrow name via swap Client Angle: Enhance returns on portfolio, better capital usage. Client Historical Trade Example using GM - Client sells 1,000,000 shares of GM on MOC for a holding period of 30 days. DB buys 1,000,000 shares of GM on MOC for 30 days. ((Shares x Price x Fee) /360) x Number of days (length of trade) ((1,000,000 x $1.9 x 80%)/360) x 30 days = $126,666 GPF pays $126,666 for just 30 day trade (assuming rates/price stay consistent for life of trade) Clients receive Enhancement on position lent. Pickup/Value of shares lent is $126,666/$1,900,000 = 666 bps 3. Client receives 666 bps of enhanced return for just 30 days of borrow. Total Return of GM Libor - Spread
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3 Custom Baskets: When no ETF is a perfect match Expensive borrow: construct a basket designed to track the ETF, using easily-available constituents Example: Cheap basket versions of XLF, XRT, IYR, others Imperfect hedge: start with a given ETF or index, and then add/subtract constituents to get the exposure you want Example: Hedging AAPL with QQQQ’s while avoiding redundancy (14% of index) Liquidity: if your ideal ETF does not trade actively, or your index contains illiquid members – remove & reweight w/ optimization Example: Russian GDR index
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