the swap menu
Total return, price return, basket, index, quanto, compo, dividend and funded swaps: what each one pays, and when you'd pick it.
concept noteevery equity swap has two legs
One side pays the equity leg: what a stock, basket or index did. The other pays the funding leg: a rate on the notional. Everything on this page is a variation on what goes into each leg, and when it gets paid.
A restaurant with one kitchen can serve the same ingredients many ways. The ingredients here are always a stock's return and a funding rate. A total return swap serves both, with dividends included. A price return swap leaves the dividends out. A quanto serves a Hong Kong dish on a US-dollar plate. Picking a swap means picking the dish that matches what you actually want to eat.
the menu
| Swap | You receive (as the long) | You pay | Use it when | In one line |
|---|---|---|---|---|
| Total return swap (single stock) | price move + dividends | SOFR/HIBOR + spread | you want leveraged or off-balance-sheet exposure to one name | renting a single stock |
| Price return swap | price move only | a lower rate, since the dealer keeps the dividends | dividends are awkward (tax, forecasting) or irrelevant | the stock without its income |
| Portfolio / basket swap | the basket's total return | funding on the whole basket, reset monthly | running a whole long/short book synthetically at a prime broker | renting a whole portfolio under one agreement |
| Index swap | an index's total return | funding + spread | you want index exposure without quarterly futures rolls | a future with no expiry and an explicit rate |
| Fixed-rate funding swap | equity return | a fixed rate agreed today | you want to remove funding-rate uncertainty for the term | a fixed-rate mortgage instead of a variable one |
| Quanto swap | a foreign stock's return, paid in your currency at a fixed FX rate | funding in your currency | you want HK stock performance with no USD/HKD risk | a Hong Kong stock on a US-dollar plate |
| Compo (cross-currency) swap | a foreign stock's return converted at the spot FX rate | funding, usually in your currency | you want the stock and the currency exposure | a foreign stock, with the currency move included |
| Dividend swap | dividends actually paid | a fixed dividend amount agreed today | trading or hedging dividends on their own | betting on the income, not the price |
| Funded swap / note | the equity return | the whole notional, up front | the buyer can't hold derivatives but can hold a note | paying for the flat in full, but through a contract |
how i'd choose
Start from the question which risks do I want? Only the price: price return swap. Price plus dividends: total return swap. The foreign stock without the currency: quanto. The currency as well: compo.
Then ask which costs can I control? Floating funding is cheaper on day one but uncertain; fixed funding costs a little more and is certain. A basket swap saves paperwork and nets margin across names; single-name swaps give cleaner pricing per name.
If a HK stock tends to fall when the HKD weakens, the dealer paying you a fixed-FX USD return loses twice in the same scenario. So quanto pricing adjusts the stock's expected drift by −ρ · σstock · σFX. With the HKD pegged, σFX is tiny, so the adjustment is small. For a JPY or KRW stock it can matter a lot.
- Every equity swap is an equity leg against a funding leg.
- The variations change what's inside each leg: dividends, currency, fixed or floating.
- Pick by the risks you want to keep, then by the costs you want to control.