Equity Swaps and Equity Investing

Abstract

In an equity swap, two parties make a series of payments to each other with at least one set of payments determined by a stock or index return. The other set of payments can be a fixed or floating rate or the return on another stock or index. Equity swaps are used to substitute for a direct transaction in stock. This article explores equity swaps, describing variations, applications, and advantages and disadvantages. It also presents and illustrates formulas for pricing and valuation and provides empirical evidence comparing the performance of equity swaps against comparable strategies involving direct investment in equity.