Total Return Swap (TRS): Meaning and Example

A total return swap (TRS) is a derivative in which one party receives the total return of an asset or index, including price changes and income, while the other party receives a financing leg or other contractual payment stream.

How It Works

TRS contracts let parties gain or shed economic exposure without transferring legal ownership of the reference asset. They are used for leverage, balance-sheet efficiency, hedging, or exposure customization.

Worked Example

A hedge fund may want exposure to a bond or equity index without buying the assets directly. Through a TRS, it can receive the total return while paying a financing-related rate to the counterparty.

Scenario Question

A trader says, “A TRS transfers only price appreciation, not income or carry.”

Answer: No. The point of a TRS is to pass through the total return, not only capital gains.

Related Terms

• Swap: A total return swap is one important swap structure.
• Hedging: TRS contracts can be used to add or reduce exposure efficiently.
• Credit Risk Transfer: Some swap structures are used specifically to reallocate credit exposure.