total rate of return swap
A total return swap or total rate of return swap is a bilateral contract where one party receives the total return on a reference asset in exchange for paying the other party a periodic cash flow, typically a floating rate such as a LIBOR-based rate. The reference asset may be a single asset or a basket of assets or an index. A total rate swap is similar to a plain vanilla swap except that a total return (that is, the cash flows from the reference asset, such as interest, as well as any capital gains and losses) is exchanged, not just the cash flows.
A key feature of a total rate swap is that the parties do not transfer actual ownership of the reference asset, as occurs in a repo. This allows greater flexibility and reduced up-front capital to execute a trade. This also means a party to a total return swaps can be more highly leveraged, making total return swaps a favourite of hedge funds.
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USA
A type of derivative that replicates the cash flows of an investment in an asset (usually a security, basket of securities, index or other financial instrument). A TRS requires the parties to make payments to each other based on the performance of the underlying asset. Under a TRS, one party, Party A, receives payment from the other, Party B, based on the appreciation in value of the asset(s) over a certain specified period (often monthly) or makes payments to Party B based on a decline in value of the asset during the specified period. This type of arrangement is often referred to as a synthetic investment. A TRS permits Party A to simulate investment in the underlying asset(s) without incurring the burden of ownership of the asset(s), including any adverse balance-sheet implications. The TRS simultaneously permits Party B to protect itself against a decline in value of the underlying asset(s).
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Practical Law Dictionary. Glossary of UK, US and international legal terms. . 2010.

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