Greetings YouTube, welcome back to my channel. In today's video we'll learn
about dividend swaps and other types of swap. Don't forget to watch the video
till the end where I'll tell you to hit the like and the subscribe buttons.
OK so today's video is on dividend swaps and other types of swaps such as
commodity swaps and equity swaps. This content is all based on my book Trading
and Pricing Financial Derivatives which is linked to in the description below.
dividend swaps are a derivative which originated in the early 2000s. They came
about due to the popularity of structured products such as
equity-linked notes which became popular in the 1990's. Most equity-linked notes
reflect capital appreciation alone and do not include gains from dividends and
dividend reinvestment for tax reasons. Investment banks were thus left holding
streams of potentially volatile dividend payments to which they wish to hedge
their exposure. This gave rise to the dividend swap. A dividend swap is an
over-the-counter derivative where the holder of the fixed leg pays the other
party a pre-designated fixed payment at each interval in exchange for the total
dividends that were paid out by a selected underlying the underlying can
be a single company a basket of companies or all of the members of an
index. The payments are multiplied by a notional number of shares
like most swaps the contract is usually arranged so that its value at signing is
zero. This is accomplished by making the value of the fixed leg equal to the
value of the floating leg thus the fixed leg will be said at the average expected
dividends over the term of the swap for the given underlying
dividend swaps share some risk similarity to an investment in cash
equities as both involve exchanging a fixed amount of money for set of
uncertain future dividends a cash equity investment however has a much higher
dividend duration than the dividend swap in the same way that a perpetuity has a
higher interest rate duration than fixed maturity bond. Duration being a
measure of the sensitivity of the price of a fixed income investment to a change
in interest rates. So that is dividend swaps. There are a lot of other types of
swap available as essentially with any two existing cash flows we can structure
a swap to exchange them let's look at a few more commodity swaps are where a
floating or spot price based on an underlying commodity is exchanged for a
fixed price over a specified period no commodities are exchanged during the
trade equity swaps where the dividends and capital gains realized on an equity
or equity index are exchanged for either a fixed or a floating interest rate
variance and volatility swaps which I've done separate videos on and I've linked
to those above. Zero coupon swaps which are views to corporations who are
floating rate liabilities but would like to conserve cash for operational
purposes. Interest rate swaps can be arranged on non LIBOR rates, currency
swaps can be fixed for floating (which are known as cross currency) interest
rate swaps are floating for floating principle amounts can reduce over time
which we call amortized or they could increase over time which we call a step
up swap sometimes options are embedded in swaps making them extendable callable
or potable swaptions are an option giving the right but not the obligation
to engage in a swap there are numerous variations available on the plain
vanilla swap structure that are limited only by the imagine and interest of
market participants so that's it on swaps don't forget to hit the like
button and the subscribe buttons to the channel hit the bell button if you would
like to be notified every time I release a new video on quantitative finance our
derivatives see you later bye