In most cases, one party to the equity swap transaction is the trading company and the other is an investment bank, with the trader initiating the contract. The trader hopes to profit by the investment made possible by the equity swap, while the bank makes a quantified profit on commission fees and any favorable spread in interest rates.
Another way to detail an equity swap is to posit this example: a trader and an investment bank contract to make an “equity swap” with a specific future date where actual money will change hands. The investment bank will provide the funds to purchase an equity instrument perhaps a stock or shares in an exchange traded fund.
For the trader, the optimum outcome is that the shares will rise to at least a level that allows the reimbursement of the invested funds to the bank, plus accumulated interest. Equity swaps are just one type of Derivative investment, a class of financial instruments that also includes Interest Rate Swaps, Total Return Swaps, Option Swaps and other so-called “Contracts for Difference”.