Could somebody explain how a passive exposure on an index can be obtained with long position in cash + long position in swap?
A short example will be very much appreciated!
Your long position in cash pays you the risk-free rate.
Your long position in an equity swap has you receive the equity index return and pay the risk-free rate.
risk-free rate + (index return – risk-free rate)
= index return
One side of the equity swap is the return on the equity index. The counterpayment is other equity instrument or index or interest payment (LIBOR or as you noted risk free). Does your explanation mean that long position on equity swap always refers to?:
pay : equity index rate
receive : LIBOR
Is this structure the only one structure with swap for obtaining a passive exposure on an index?
I don’t know if there’s a convention on equity swaps about which side is considered long and which short. In this question, paying some market rate (risk-free rate, LIBOR, whatever) and receiving the equity return is the only position that makes sense: you want to earn the equity return.
Thank you for your answers. Very much appreciated!
My pleasure.