Similar to a total return swap on a bond, it is a 2-sided financial contract in that one counterparty pays out the total return of the equity, including its dividends and capital appreciation or depreciation, and in return, receives a regular fixed or floating cash flow. For convenience the asset’s total return is called a TR-leg and the fixed or floating cash flow a non-TR leg. A total return swap can be settled at the terminating date only or periodically, e.g., quarterly. The equity used in a total return swap contract can be a single publicly traded stock or a private stock, a portfolio of stocks, a stock index, or even any market index. The buyer of a total return equity swap can gain the economic exposure to certain equity or index market without physically owning such assets while the seller of a total return equity swap can reduce or eliminate the market risk of his/her stock portfolio without selling the assets and gain stable returns.
