Definition of Equity swap:
An equity swap is an exchange of future cash flows between two parties that allows each party to diversify its income for a specified period of time while still holding its original assets. An equity swap is similar to an interest rate swap, but rather than one leg being the "fixed" side, it is based on the return of an equity index. The two sets of nominally equal cash flows are exchanged as per the terms of the swap, which may involve an equity-based cash flow (such as from a stock asset, called the reference equity) that is traded for fixed-income cash flow (such as a benchmark interest rate).
Swaps trade over-the-counter and are very customizable, based on what two parties agree to. Besides diversification and tax benefits, equity swaps allow large institutions to hedge specific assets or positions in their portfolios.
Arrangement under which a party exchanges the rate of return on an equity security (or equity index) for another partys fixed or floating rate of interest.
How to use Equity swap in a sentence?
- The interest rate leg is often referenced to LIBOR while the equity leg is often referenced to a major stock index such as the S&P 500.
- These swaps are highly customizable and are traded over-the-counter. Most equity swaps are conducted between large financing firms such as auto financiers, investment banks, and lending institutions.
- An equity swap is similar to an interest rate swap, but rather than one leg being the "fixed" side, it is based on the return of an equity index.
Meaning of Equity swap & Equity swap Definition