What is an equity swap, and how does it work?

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[...] However, if LIBOR increases by 200bps a year (or the total interest paid to bondholders would be $350k. On the other hand, per swap agreement, XYZ will pay these $350k to ABC, while receiving only $300k, same as the first scenario. In this case, ABC gains from the swap deal. 1 Source: John C. Hull Options, Futures and Other Derivatives 8[th] Edition Prentice Hall 2012 ISBN 9780132164948 2 EURIBOR: Euro Interbank Offered Rate 3 LIBOR: London Interbank Offered Rate 4 Source: Idem. [...]

[...] The equity swap allows a financial investor to diversify their portfolio without little to no exposition to the underlying asset. The particulars of swap deals are such as only a specific class of investors contract swap derivatives: usually large financial institutions want to hedge their position on particular assets in their portfolios, that is, increase or contract their exposure to an equity without buying or selling its underlying asset. A portfolio manager may want to exchange returns from a fixed (variable) investment vehicle to returns from investing in a variable equity (fixed-income) asset class. [...]

[...] What is an equity swap, and how does it work? A swap is a derivative contract between two agents[1], which can be applied to a wide variety of asset classes. A swap contract involves the exchange of financial instruments, usually streams of cashflows called legs. One leg is comprised of a fixed cashflow, while the other is fixed, and indexed to a benchmark asset. Investors may use EURIBOR[2] or LIBOR[3] as interest rate benchmarks, or an index price, depending on the underlying asset class in the swap contract. [...]