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Part - XI
Total return swaps: A total rate of return swap transfers the total economic performance of a reference asset or index-including cash flows and capital appreciation or depreciation-from one party to another. The total return payer pays the total rate of return on the reference asset plus any appreciation; the total return receiver pays a floating rate plus any depreciation on the reference asset. This structure allows one counterparty to hedge the risk of an asset while it remains on the books. Total return swaps are also flexible, allowing users to buy protection for, say, the last two years of a five-year bond. Total return swaps are particularly popular among insurance companies which, for regulatory purposes, are required to hold some instruments to maturity.
Credit-linked notes: A credit-linked note is an on-balance-sheet, cash market structured note, typically issued by a special purpose trust vehicle. The note represents a synthetic corporate bond or loan, because another credit derivative (such as a credit default swap or a total return swap) is embedded within the structure. The performance of credit-linked notes may be associated with a single reference credit-or a basket of reference credits.
Credit spread options: Credit spread options are simply options on a particular reference credit's credit spread in the loan or bond market. One party pays a premium up front in return for a lump sum payment in the event that the reference credit's spread crosses a certain threshold.
Concluded.
* Contributed by -
Prashant Jadhav,
2nd Year PGeMBA (Finance),
Mumbai Educational Trust (MET) Schools of Management, Mumbai.
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