Research On CROSS-boader Return Swaps

Cross-border return swap is a financial derivative contract that has beenrecently introduced into China. At each settlement date, two counterpartiesfrom different countries exchange their revenue from certain assets. As anOTC product, little public research has been carried out. Throughtheoretical analysis, structural analysis, quantitative valuation on agreementprotocols, and simulation cases to introduce this product.By comparing the difference of revenues from cross-border return swap anddirect investment in overseas markets, we can find that since only the netrevenue turn into cash flow between countries, this product helps to protectits principal from exchange rate risk. For investors, under the expectation oflocal currency appreciation, this product is more advantageous than directoverseas investments.At the same time, this swap greatly reduces the actualcapital flows that enable investors to expand the scale of investment underthe qualified cross-border investment limits. While form the perspective ofthe regulators, the product can also help to alleviate the impact ofinternational capital flows on the exchange rate of local currency.Finally, last chapter made conclusion for the study and gave suggestions forthe high default risk of this swap product.