Swaps can be used to allocate assets within a fund/ portfolio while maintaining its actual composition of equity or fixed income investments. More specifically, this can be done by altering equity exposure and fixed income dollar duration without having to trade individual stocks and bonds. For example, if an investment bank wants to increase its equity exposure to a specific geographic area by $200 million and decrease its dollar duration by $120 million.

Instead of trading stocks and bonds, the bank may enter into an equity swap in which it pays the return of the bond portfolio with 12-year duration and receives the return on a relevant equity index. The notional amount of the swap is set at $200. By paying the return on $ 200 million of notional principal amount on a bond index with 12-year maturity, the bank is effectively reducing its dollar duration by $12 million. The swap, in addition to a $200 million long position in the underlying stock index, allows the bank to reshuffle its portfolio without buying the individual stocks.