In a TRS contract, the party receiving the total return receives all the income generated by the financial asset without owning it. The beneficiary party benefits from any price increases in the value of the assets during the term of the contract. The beneficiary must then pay the owner of the patrimony the basic rate during the term of the TRS. The owner of the asset loses the risk associated with the asset, but absorbs the credit risk to which the asset is exposed. For example, when the price of the property decreases over the life of the TRS, the beneficiary pays the owner an amount corresponding to the amount of the decrease in the price of the property. The other major advantage of a Total Return swap is that it allows the TRS beneficiary to make a cancelled investment and thus make the most of their investment capital. Unlike a repo transaction which results in a transfer of ownership of assets, a TRS contract does not provide for a transfer of ownership. This means that the Recipient of Total Return does not need to raise significant capital to purchase the asset. Instead, an OEE allows the beneficiary to benefit from the underlying asset without owning it, making it the preferred method of financing for hedge funds and special purpose vehicles (SPVs). Less prevalent, but related, are participatory return swap agreements and reverse rights exchange agreements, which typically include 50% of the return or another specific amount.
Reverse swaps include selling the asset with the seller and then buying the returns, usually on stocks. Credit derivatives include full return swaps. While this is a less common type of credit derivative, it is an important off-balance sheet instrument, especially for hedge funds and banks looking to collect additional fees. The definition of “damage” and the determination of the value of the “damaged” car are terms negotiated by the investor and the lessor at the beginning of the lease agreement. In some cases, the lease agreement may allow the investor to purchase the car at the market value of the car at the end of the lease agreement. The method of determining the market value of the car is negotiated by the investor and the lessor before signing the lease agreement. Among the major players in the total return swap market are large institutional investors such as investment banks, investment funds, commercial banks, pension funds, funds of funds of funds (FOF) A fund of funds (FOF) is an investment vehicle in which a fund invests in a portfolio composed of units of other funds. private equity funds, insurance companies, NGOs and governments. .