Could someone pls explain me total return equity swap? How exactly is the investor fully hedged if they have to pay the counterparty (dealer) any decline in the price of the share? Especially if it is more than libor?
You may be thinking the wrong way( or I may stand corrected). Here the problem is of a concentrated position in a stock. Along with other risks, the major risk is price depreciation of the asset for the horizon under consideration . If so, the investor would want to insure (hedge) the asset for the horizon. Since sale is out of question the investor enters a TR swap with a counterparty. The terms being he would exchange the TR of the stock against Libor. The position is now hedged completely against the downside risk. In case the stock depreciates, the investor stands to earn the Libor + the negative return from the counterparty. On the other hands all gains if any will be exchanged against Libor under price appreciation. I think you thought the other way.
In case of a price decline the owner has to compensate the dealer for it. If what I read and interpreted is correct. Hence, the question.
Okay I just checked in this reading they have mentioned it the other way. Which even makes intuitive sense. My memory of an equity swap then is from other reading.
Thanks