A swap in which one party pays the total return of an asset and receives a floating rate. It gives exposure to the asset without owning it.
Where you will meet it
Total return swap comes up in 3 learning outcome notes across the FRM syllabus.
A few of them:
Credit Risk Transfer Mechanisms FRM Part I · Foundations of risk management
“A total return swap passes on the whole economic return of an asset, so the receiver takes market as well as credit risk.”
Credit Derivatives FRM Part II · Credit risk measurement and management
“A total return swap (TRS) passes the full return of an asset, coupons plus price gains and losses, from the payer to the receiver in exchange for a funding rate plus a spread.”
Liquidity and Leverage FRM Part II · Liquidity and treasury risk measurement and management
“A total return swap passes the asset's total return to the receiver in exchange for a financing payment, giving leveraged exposure off balance sheet.”
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