Consider the same simple setting used in the TRS setting. Bank A, a highly rated bank, has a funding cost of Libor (L) rate, while Bank B, a lower rated entity, has a funding cost of L + 40 basis points. Bank A has on its books an obligation currently yielding L + 60 basis points. Bank B wants exposure to the credit risk of that obligation. Why and how should Bank B employ TRS and benefit from it? Why and how could Bank A benefit from the TRS contract?

Answer rating: 100% (QA)

In this scenario Bank B wants exposure to the credit risk of an obligation held by Bank A To achieve this Bank B can employ a Total Return Swap TRS co... View the full answer