Explain the major benefits of a total return swap?
What will be an ideal response?
• Owners of total return swaps get the financial benefits of owning the underlier
(e.g., equity indices, bundles of loans, or portfolios of bonds) without putting up the
full price of the underlier (i.e., they can operate on margin).
• Total return swaps are very flexible, allowing users to change their positions quickly.
• Total return swaps can be used to hedge existing positions where default is suspected.
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