Which one of the following four statements represents a possible disadvantage of using total return swap to manage equity portfolio risks?

Which one of the following four statements represents a possible disadvantage of using total return swap to manage equity portfolio risks?
A . Similar to the formal portfolio rebalancing strategy, the total return receiver needs to modify the size of the trading position.
B . The total return receiver needs to incur the transaction costs of establishing an equity position.
C . Similar to an equity forward position, the total return receiver does not get paid the dividend.
D . The total return receiver does not have any voting rights.

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Answer: C

Explanation:

Total return swaps (TRS) are financial derivatives used to manage risks in equity portfolios. One party agrees to pay the total return of an asset (including dividends and capital gains) while the other party pays a fixed or floating rate.

A key disadvantage for the total return receiver in using TRS is:

No Dividend Payment: The total return receiver does not receive actual dividend payments directly. Instead, they receive an equivalent payment reflecting the dividend amount, which might not have the same tax advantages as actual dividends. This can be a significant disadvantage compared to holding the underlying equities directly, where dividends are paid out to the shareholder.

Other Disadvantages: While the TRS allows the receiver to gain exposure to the underlying equity without owning it, it also means they forgo any direct voting rights and must incur costs to establish and manage the position.