What are the total return swaps?
Today we will try to explain in words since we don’t properly understand this simple concept, the one of the total return swaps, also known by the acronyms TRS or TRORS. These credit derivatives or transactions in which an entity called total return payer transfers to another party , called total return receiver the entire risk and return of an underlying asset , in exchange for receiving a flow of money paid on specified dates and connected to an indicator of the market to which is added a spread ( euribor + spread TRS) .
The concept is quite similar to that of credit default swaps, with the difference that the exchange of cash flows are much more complex than in the CDS , which takes place in a simple periodic payment of a certain amount of protection against the risk of default .
The total return payer (also known as TRP or protection buyer) are not, however, small savers, but usually large investors, investment banks, mutual funds and insurance companies. While the total return receiver (also known by the initials or the expression TRR protection seller) usually are represented by hedge funds, asset managers and the so-called “special purpose vehicle “(special purpose vehicle).