A trigger swap (a hybrid derivative/ hybrid product) that capitalizes on a combined performance of a specific equity and interest rate underlying. It is a type of an interest rate swap that is liked a certain type of a trigger. An example is a swap whereby the dealer pays a stream of LIBOR linked amounts and receives a fixed coupon every reset date, where that coupon is determined by the level of an equity index on the reset days.
Practically, in this equity hybrid derivative, the first fixed coupon is fixed, while rest coupons are all conditional on the level of trading on the selected equity index. The client (say, a bank) will receive a stream of LIBOR and plus a margin and pay a fixed coupon to the dealer based on the current level of the market index. Conditionality may be defined as a knock-out event. If the index is currently trading at a specific level (say 1000), and the trigger is set at 900. If the index ever hits 900 during the life of the swap, the fixed coupons will be knocked out (i.e., the fixed leg will knock out automatically).
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