Exploring the Mechanics and Applications of Equity Swaps in Investment Portfolio

Christopher Small and Andrew Weisman ()
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Christopher Small: LLC
Andrew Weisman: Market Revealed Preference

Chapter Chapter 21 in Derivatives Applications in Asset Management, 2025, pp 339-350 from Springer

Abstract: Abstract This chapter focuses on how equity swaps are utilized in portfolio management to achieve strategic objectives, manage risk, and enhance operational efficiency. Equity swaps are derivative contracts allowing two parties to exchange cash flows, typically one tied to an equity index or stock basket and the other to a fixed or floating interest rate. This setup offers a cost-effective and flexible means for portfolio managers to gain equity exposure, rebalance portfolios, hedge risk, and access restricted markets without directly owning the underlying securities. Multiple applications of equity swaps, including speculation, where portfolio managers can bet on stock movements without purchasing the assets, and hedging, which protects against potential losses by procuring the economic effects of selling an equity position without actually divesting it. Additionally, equity swaps facilitate asset allocation adjustments, allowing portfolio managers to achieve desired exposure levels efficiently. They also enable leverage, offering amplified market exposure with less initial capital and providing access to markets that may be restricted due to regulations or high entry costs. Equity swaps can also tailor tax efficiency and operational risk management, reducing transaction costs and simplifying the management of diverse portfolios.

Keywords: Arbitrage strategies; Implied volatility; Realized volatility; Variance risk premium; Variance swaps (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-86354-7_21

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DOI: 10.1007/978-3-031-86354-7_21

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