In a total rate of return swap (TROR), the TROR receiver will pay the TROR payer if the reference obligation experiences a price decline that is greater than the coupon. The price decline could be due to an increase in credit risk or an increase in interest rates. Thus the TROR protects the TROR payer against interest rate risk. In the credit spread derivatives mentioned, the contracts’ values depend on a credit spread that is the difference between the reference obligation’s yield and a risk-free bond. The credit spread and the contracts’ values will thus be unaffected by changes in market-wide interest rates, all else equal. |
