The Use of Equity Swaps in Mergers

Abstract

Cash-settled equity swaps are an integral part of any portfolio manager’s toolkit. In their simplest form, an equity swap involves one party exchanging cash flows that mimic a fixed or floating interest rate for cash flows designed to replicate the income and capital return of a parcel of shares (Ali, 1999; Marshall and Yuyuenonwatana, 2000). Equity swaps can also be used to replicate the returns on a basket of different shares or an entire stock market. In this way, an investor is able to obtain economic exposure to the shares underlying the equity swap without having to purchase those shares. In addition, investors routinely make use of equity swaps to avoid transactional imposts (for exam..