what is an equity swap 
an equity swap is an exchange of future cash flows between two parties that allows each party to diversify its income for a specified period of time while still holding its original assets an equity swap is similar to an interest rate swap but rather than one leg being the fixed side it is based on the return of an equity index the two sets of nominally equal cash flows are exchanged as per the terms of the swap which may involve an equity based cash flow such as from a stock asset called the reference equity that is traded for fixed income cash flow such as a benchmark interest rate swaps trade over the counter and are very customizable based on what the two parties agree to besides diversification and tax benefits equity swaps allow large institutions to hedge specific assets or positions in their portfolios equity swaps should not be confused with a debt equity swap which is a restructuring transaction in which the obligations or debts of a company or individual are exchanged for equity because equity swaps trade otc there is counterparty risk involved 