Equity Swap

AAA

DEFINITION of 'Equity Swap'

An exchange of cash flows between two parties that allows each party to diversify its income, while still holding its original assets. 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) that is traded for a fixed-income cash flow (such as a benchmark rate), but this is not necessarily the case. Besides diversification and tax benefits, equity swaps also allow large institutions to hedge specific assets or positions in their portfolios.

INVESTOPEDIA EXPLAINS 'Equity Swap'

Most equity swaps today are conducted between large financing firms such as auto financiers, investment banks and capital lending institutions. LIBOR rates are a common benchmark for the fixed income portion of equity swaps, which also tend to be held at intervals of one year or less, much like commercial paper.

RELATED TERMS
  1. LIBOR

    LIBOR or ICE LIBOR (previously BBA LIBOR) is a benchmark rate ...
  2. Non-Deliverable Swap - NDS

    A currency swap between major and minor currencies that is restricted ...
  3. Debt/Equity Swap

    A transaction in which the obligations (debts) of a company or ...
  4. Total Return Swap

    A swap agreement in which one party makes payments based on a ...
  5. Swap

    Traditionally, the exchange of one security for another to change ...
  6. Derivative

    A security whose price is dependent upon or derived from one ...
Related Articles
  1. An Introduction To Swaps
    Options & Futures

    An Introduction To Swaps

  2. How Companies Use Derivatives To Hedge ...
    Active Trading

    How Companies Use Derivatives To Hedge ...

  3. What is a debt/equity swap?
    Investing

    What is a debt/equity swap?

  4. All About Liquid Commodities
    Options & Futures

    All About Liquid Commodities

comments powered by Disqus
Hot Definitions
  1. Correlation

    In the world of finance, a statistical measure of how two securities move in relation to each other. Correlations are used ...
  2. Letter Of Credit

    A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. ...
  3. Due Diligence - DD

    1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to ...
  4. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  5. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  6. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
Trading Center