Funding adjustments in equity linear products

How tax asymmetries and Tobin tax affect the pricing of total return swaps


Starting from a general pricing framework inclusive of valuation adjustments, Stefania Gabrielli, Andrea Pallavicini and Stefano Scoleri derive simple evaluation formulas for total return equity swaps when stock lending and borrowing are adopted as hedging strategies. They show how funding costs arising from collateral procedures, hedging strategies and taxes affect the production cost of the contract so that a profitability analysis can be reliably assessed


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