Choosing Valuation Methods for the Legs of an Equity Total Return Swap

Summary

The document asks whether the two legs of a total return swap can be valued using different methods. The proposed structure uses an accrual approach for an equity asset leg that resets periodically and a projected approach for a fixed-rate financing leg with a multi-year tenor and periodic payments. The motivation is to make the swap's value correspond to holding the equity position while financing it with fixed-rate debt.

No answer or valuation equations are included, so the document does not establish whether this hybrid treatment is appropriate or whether both legs must follow a consistent methodology. It identifies the key modeling question: valuation choices should reflect the cash flows, reset conventions, and intended replication of each leg, while preserving a coherent value for the complete contract. The stated terms describe the proposed setup, but there is no numerical example, market data, or discussion of discounting assumptions to resolve the question.

Key ideas

• The question concerns valuing an equity total return swap with different methods for its asset and financing legs.
• The proposed asset leg uses accrual valuation and resets periodically.
• The financing leg is described as fixed rate, periodically paid, and multi-year in tenor.
• The intended comparison is with holding the equity and financing it through fixed-rate debt.
• The document gives no answer or worked valuation, so it does not settle whether the hybrid approach is valid.

Tags

# Pricing a TRS using the Projected method for the financing leg and the Accrual method for the asset leg


# Pricing a TRS using the Projected method for the financing leg and the Accrual method for the asset leg












I've been wandering if would be possible to value a TRS I have in an unusual way. I would like use the accrual method for the asset leg, since the the asset leg is a long position in an equity and it reset periodically (every 3 months) but price the financing leg using the projected method since this leg has a multi-year tenor maturity and a fix rate, with periodic payments (every 3 months). The purpose of using this "hybrid" so that the value of the TRS contract would be equivalent to the value of holding the same position in the following way: being long on the asset and a debt at a fixed rate. Would it be reasonable to value it this way or is the fact that it's the same contract force me to valuate both leg with the same methodology?

Thank you, Regards,

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