Book contents
- Frontmatter
- Dedication
- Contents
- List of Tables, Figures and Boxes
- Foreword
- Preface to the First Edition
- Preface to the Second Edition
- Acknowledgements
- Part–I Introduction
- Part–II Forwards and Futures
- Part–III Swaps
- 8 Swaps – Part I: Interest Rate and Currency Swaps
- 9 Swaps – Part II: Other Swaps
- Part–IV Options
- Part–V Other Derivatives and Derivative-like Instruments
- Part–VI Accounting, Taxation and Regulatory Framework
- Part–VII Portfolio Management and Management of Derivative Risks
- Bibliography
- Index
9 - Swaps – Part II: Other Swaps
from Part–III - Swaps
Published online by Cambridge University Press: 02 August 2019
- Frontmatter
- Dedication
- Contents
- List of Tables, Figures and Boxes
- Foreword
- Preface to the First Edition
- Preface to the Second Edition
- Acknowledgements
- Part–I Introduction
- Part–II Forwards and Futures
- Part–III Swaps
- 8 Swaps – Part I: Interest Rate and Currency Swaps
- 9 Swaps – Part II: Other Swaps
- Part–IV Options
- Part–V Other Derivatives and Derivative-like Instruments
- Part–VI Accounting, Taxation and Regulatory Framework
- Part–VII Portfolio Management and Management of Derivative Risks
- Bibliography
- Index
Summary
This chapter looks at some more kinds of swap transactions and at certain general issues relating to swap markets.
Equity swaps
An equity swap is an arrangement by which one party pays to the counter-party an amount based on the value of the shares in a company, and receives from the counter-party an amount of fixed or floating interest on an equivalent notional value. In effect, an equity position is converted into a deposit or debenture.
Example 9.1
X Ltd owns a large stake of one lakh shares in Y Ltd, a quoted sister company. The shares are currently quoted at 1,000 per share. X is apprehensive that the price of Y's shares may fall, but does not want to sell its stake as that would mean relinquishing its say over the management of Y Ltd. Instead it enters into an equity swap with Z Ltd, a financial institution, whereby
i. X will pay Z annually the value of all dividends declared by Y plus or minus any net appreciation or depreciation in the share price (from the base value of 1,000) on its one lakh shares.
ii. Z will pay X annually the market floating rate of interest on a sum of 10 crore, being the market value of X's holding at the time of the swap.
Financially, the effect of an equity swap is the same as that of selling the shares outright. However, the shareholder may wish to retain the shares for reasons of control (as in the Example above) or to avoid capital gains tax, or to avoid giving a negative signal to the market. (For example, a sale of Tata Motors shares by Tata Sons might provoke general bearishness in Tata Motors shares, which can be avoided through an equity swap.) The disadvantage is that there is a transaction cost. Depending on the prevailing market sentiment, a premium may have to be paid by one or other party to attract the counterparty and there will usually be a margin for the intermediary.
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- Derivatives , pp. 143 - 152Publisher: Cambridge University PressPrint publication year: 2017