Equity Swap

A swap involves trading cash flows. "I swap the next 11 years of interest from this bond issued by Comcast in return for the dividend stream from your investment portfolio in real estate running for the next 11 years..." Or something like that. It's a derivative contract where two parties trade off money they are earning from different investments. The term "equity swap" comes into play when one of the items involved is an equity holding.

Usually, one side is trading the money earned from dividends or capital gains from their equity investment for some interest rate-related cash flow (like from a bond) from someone else.

So...you're making money from a string of lemonade stands you bought into. Meanwhile, your friend is drawing cash from a bunch of floating-rate Serbian government bonds his grandma gave him for his sweet 16. You're a little worried about the lemonade business (it's headed into winter). Meanwhile, you think there's a real chance rates will spike in Serbia in the near future. Rather than trading the assets outright, you enter into an equity swap that expires next spring.

During that time, you get the money from the Serbian bonds and your friend gets the cash generated from the lemonade equity. Once the swap expires, things go back to normal and everyone keeps the cash from their own investments.

See: Swap.