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Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition by Youssef F. Bissada, Jean Dermine

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Total rate of return swaps (TRORS)

The structure of the deal (Figure 18.2) is very similar to that of the credit default swaps. The difference concerns the exchange of payments between the protection buyer and the protection seller. The protection buyer will pay, every quarter, a fee of ‘m’ basis points plus any positive appreciation in the value of the underlying loans/bonds. So, any capital gain is passed to the protection seller. In return, the protection seller covers not only the risk of default, but also compensates the protection buyer for any reduction of value in the asset (capital loss), even when there is no default. A TRORS therefore provides protection not only against default risk, but also against any change of value of the underlying ...

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