NYAIR Episode 34 – Total Return Swaps & How Investors Can Use Them to Boost Returns

ByBritt Tunick

Derivatives can be effective vehicles to transfer risk or gain exposure to an underlying asset without having to buy or sell the asset.  A Total Return Swap (TRS) is an agreement between two parties to transfer the total economic exposure, including both market and credit risk, of the underlying asset which is generally an equity index, bonds, or loans.  Given the affordability and leverage provided by TRS they are an increasingly popular alternative investment used by portfolio managers to hedge portfolios or quickly gain exposure to an asset class.

John Dukich, founder of the derivative software trading, processing, and risk management firm, Ferential Systems, addresses some ways investors are using TRS to boost returns and some of the processing requirements/issues investors face when using this vehicle.

  • What is a total return swap? What are some of the benefits of total return swaps
  • What are the mechanics/pricing methodology of total return swaps?
  • How are investors using total return swaps to boost returns?
  • What are some of the processing requirements/challenges for firms that use total return swaps as an alternative investment vehicle?

John Dukich has been President of Ferential Systems, Inc. since 1996, and has over 30 years in both the accounting and risk management fields.  His roles during the 1980s include CPA at Arthur Andersen (Accenture), Assistant Secretary in the accounting policy/strategic management group at Irving Trust (BNY Mellon), and Trader in the capital markets group at HSBC.  In the 1990s, Mr. Dukich held the titles of Chief Architect of the VaR system at Thomson Reuters, Partner of Integrated Computer Development at Vertek Financial Systems, and Director of Risk Management Systems at PricewaterhouseCoopers.