Statement I is correct. The TRS payer pays the total return on a reference asset, while the TRS receiver typically pays a floating rate such as LIBOR plus a spread. Statement II is incorrect. Under a TRS a protection seller bears all risk (market risk, interest rate risk, etc.), not just credit risk. Statment III is correct—this is similar to other OTC derivatives. Statement IV is correct. The TRS receiver must compensate the TRS payer for negative returns on the reference asset. |
