How an institution with portfolio of loans

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Consider a total return swap (TRS), which is a contract where the protection buyer makes payments linked to the total return on a reference asset, and in exchange, the protection seller makes a series of payments tied to a reference rate, such as LIBOR, plus a spread; if the price of the asset goes down, the protection buyer receives a payment from the counterparty; if the price goes up, a payment is due in the other direction. Show in a diagram how an institution with a portfolio of loans can use TRS to hedge its exposure to credit risk.

Reference no: EM132020695

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