The total return swap provides the protection buyer with a payoff for a decline in the value of the underlying regardless of the reason for the decline. A default or spread product specifies a particular condition that must occur. In the case of a credit default option being used to hedge a bond, for example, the spread could widen from macroeconomic factors, which would cause the bond’s value to decline. Since the decline was not caused by a default, however, the option would not provide a payoff. |
