What is the definition of Total Return Swap (TRS)?

A Total Return Swap (TRS) is a financial derivative which requires one party to make set rate payments in order to receive payments based on the performance of a certain asset, index, bond etc.

TRS allows an investor to gain exposure to a class of asset without having to own the asset, merely paying someone else a fixed rate to hold the asset. This requires a certain amount of risk for both parties:

• The owner of the TRS is assuming that the returns on the underlying asset will exceed the rate he has to pay
• The issuer of the TRS is assuming that the rates he receives from the investor will be higher than the return on the asset