Apparently, inverse stock market ETFs (so-called bear ETFs) are constructed by taking positions in total return stock market index swaps, that is, the ETF forms a contract with an investment bank, who agrees to pay the inverse of the stock market return for a given period.

Is it possible for an individual to get into a total return swap contract? Are stock market swaps traded in exchanges (I presume not), and if not, could I call a bank or a broker and make a contract with them directly? (I presume this would require a minimum amount of money, roughly how much?)

  • 1
    "Could I call a bank or a broker and make a contract with them directly?" If you want to construct a new type of financial contract not available on the public market, you would probably need in the 10M+ range to even get in the door. Think like in the movie Big Short, how much money was moved around to create the swaps against the mortgage market, when none were previously available. Commented Mar 8, 2017 at 20:30
  • I believe corporations can make currency forward contracts with banks for very little money (even a few thousands). Since a return swap is equally simple, I would assume a bank not requiring capital in the range of dozens of millions (do you have information to back this up?). Note that swaps in Big Short were, I believe, CDSs, which are more complex derivatives.
    – lopta88
    Commented Mar 8, 2017 at 20:34
  • Currency forward contracts are available to the public market. It is routine for the bank to sell them, and there is high liquidity (many people trading them). This means that the banks can trade very small contracts and cover their administrative costs quite easily. For any product that does not already exist (and I'm not sure whether yours does, but in case it doesn't...), the bank will not have a 'counterparty'. ie: The bank takes a risk opposite to yours [where with an fx contract, the bank sells one side to you, and the other side to someone else, leaving them profit from fees]. Commented Mar 8, 2017 at 20:46
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    So, in order for the bank to construct a special contract, they need (1) lawyers to draft the contracts, in clear and unambiguous language; (2) financial analysis to run numbers on what the bank thinks the contract is worth... etc. etc. - In order to cover these administrative costs and the associated risk, the bank would need a lot of money to be on the table to even open up discussion. Basically what I mean is - if it's a product that doesn't have an immediately available price that you can look up yourself, it would be prohibitively expensive. Commented Mar 8, 2017 at 20:47


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