An Equity Swap is useful if a portfolio manager has a bearish outlook on the mar
ID: 2620297 • Letter: A
Question
An Equity Swap is useful if a portfolio manager has a bearish outlook on the markets. a. A manger can swap out of negative equity returns in favor of a positive fixed return at a cost of the upside to equity returns b. A manager, for a minimal cost can swap out of equity returns for cash returns or fixed income returns, which-ever is greater, by paying a set fee c. The manager swap out of equity returns if desired but then can not swap back in at a later date. d. Can utilize an Equity SWAP to enhance portfolio returns no matter which direction the market is anticipated to move. e. None of the above
Explanation / Answer
Answer : "b. A manager, for a minimal cost can swap out of equity returns for cash returns or fixed income returns, which-ever is greater, by paying a set fee"
=> Even through the equity is providing negative cash flow but we have to pay taxes, interest, and fees on the negative equity transactions, so a manager swap a minimum cash returns of the fixed securities to pay these charges.