How does a total return equity swap replicate stock ownership without buying shares?

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AcadiFi · Accepted Answer

A total return equity swap (TRS) transfers the complete economic exposure of a reference equity without legal ownership. Westbridge Capital wants $200M exposure to Ironwood Semiconductor shares without filing 13D disclosures or tying up full capital. Westbridge (total return receiver) enters a 1-year TRS with Sentinel Prime Brokerage (total return payer). Mechanics: 1. Reference: 1.2M shares of Ironwood at $166.67 strike = $200M notional. 2. Westbridge pays Sentinel quarterly: SOFR + 85bp on $200M financing leg. 3. Sentinel pays Westbridge: all dividends on 1.2M shares + any price appreciation at reset. 4. If price falls, Westbridge pays Sentinel the depreciation plus the financing spread. If Ironwood rises 18% to $196.67 over one year and pays $1.20 quarterly dividends, Westbridge receives $30M × 1.2M shares / 1.2M + $5.76M dividends = $35.76M, and pays financing ~ $200M × 5.35% = $10.7M. Net: $25.06M on ~$15M margin posted — 167% return. ```mermaid flowchart LR W[Westbridge
TR Receiver] -->|SOFR+85bp| S[Sentinel
TR Payer] S -->|Dividends| W S -->|Price appreciation| W W -.->|Depreciation| S ``` Risks: Westbridge faces Sentinel's counterparty risk, and leverage amplifies losses. The Archegos 2021 collapse showed that concentrated TRS positions hidden from disclosure can produce systemic losses when margin calls cascade across prime brokers.

How does a total return equity swap replicate stock ownership without buying shares?

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