Let's examine the mechanics of an equity swap. Where a hedge fund takes a short position. To start, the hedge fund submits an order to their prime broker or PB to short 75,000 Walmart shares on swap. Before the prime broker can short sell the shares to hedge the equity receiver's position, it must first borrow the shares from an institutional investor or another market participant, such as a pension fund. Borrowing ensures that the prime broker can deliver the shares to the market, but incurs a stock loan fee. Which is reflected in the financing cost for the swap.

The agreed upon financing rates for this swap is SOFR minus 60 basis points.

SOFR is reduced by 60 basis points to account for the stock. Borrowing fee assumes to be 20 basis points, as well as the prime broker's cost of capital and a small margin assumed to be 40 basis points. Once the shares are borrowed, the prime broker's trader sells 75,000 Walmart shares in the markets to establish the short position and hedge the swap. Let's assume that the agreed upon opening price is 93.55 per share.

Now, let's assume that the hedge fund decides to exit the position after 22 days.

When the hedge fund decides to exit the position, the prime broker buys back the shares in the market to close the short hedge and returns them to the original lender. The profit or loss on the trade is determined by the difference between the opening and closing prices.

Suppose the closing share price is 92.05 per share. This price is lower than the opening price of 93.55 resulting in a gain for the short position. The share price decreased by 1.5 per share.

Multiplying this by the 75,000 shares, the total gain on the trade is 112,500.

Now let's calculate the financing leg for this short equity swap. Over the 22 days, the swap was open let's assume the compounded SOFR rate was 5.1% annually, subtracting the 0.6% spread results in a total annualized rate of 4.5%.

The financing cashflow to the hedge fund is calculated by applying this annualized rate of 4.5% to the notional value of 7,016,250, which was the original stock price times by the 75,000 shares, and then pro rating it to the 22 days the swap was open. The result is a financing credit of approximately 19,295, which the prime broker owes to the hedge fund.

Finally, we calculate the hedge fund's net results by combining the gain from the price decrease with the financing credits. Adding the financing credit of 19,295 to the gain of 112,500. Their hedge fund achieves a total net profit of 131,795.