Equity swap - Financial definition
Financial acronyms
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Concise definition of the term equity swap
A type of total return swap in which all proceedings from an equity or equity index are exchanged against a floating-rate payment (usually Euribor or Libor plus or minus a spread).
Comprehensive definition of the term equity swap
The total return on an equity index includes both dividends and price performance. It can thus be either positive or negative, depending on how the market performs.
The swap uses a notional principal, just like an interest rate swap, which is never exchanged, but is used to calculate the payments owing on both sides of the swap.
By entering into an equity swap, an investor can gain leveraged (because unfunded) exposure to all the economic risks associated with the underlying instrument, without actually acquiring the underlying itself.
The swap could be structured with a notional principal which changes - a Variable Principal Equity Swap - which allows index tracking. It could also could be structured as a Two-Way Equity Swap which allows for the total returns on two different stock market indices to be exchanged.