Equity Swap

In an equity swap, one counterparty pays a fixed or floating-rate of interest and receives the total return on a stock, a stock basket or a stock index. The counterparties agree on a notional principal amount, the interest rate and payment frequency on the cash leg (Libor or equivalent, plus a spread or a fixed rate), and a tenor. If the equity leg of the swap is an index, the payer of the equity leg pays the return, including dividends, on the index times the notional principal amount, and receives the cash amount at the agreed level. If the stock rises, the receiver of the stock returns will receive the percentage rise plus dividends on the Notional Principal and pay the agreed interest. If the stock falls, the receiver of the stock returns will have to pay the equivalent loss minus the dividends receivable plus the agreed interest. Swaps can also be constructed where both legs are equity indices, baskets or stocks.