Under extreme market stress, physical assets can have a negative value. A famous real-world example occurred in April 2020 when WTI Crude Oil futures dropped to -$37.63 per barrel due to a storage shortage. A partial basket swap allows a fund to purely trade the correlation change between those exotic payoffs without having to manage the individual delta-hedging of each underlying asset. By entering a partial basket swap, the bank can transfer a 30% slice of the exotic volatility or barrier risk to a specialized hedge fund, cleanly removing the exact risk layer they cannot comfortably manage. In a theoretical arbitrage market, you hedge an exotic option by dynamically trading the underlying asset. For complex barrier options or volatility swaps, this is practically impossible due to sudden price jumps and liquidity gaps . The Arbitrage Reality: Because the bank cannot perfectly replicate the 30% exotic basket slice, they cannot completely eliminate the risk via standard market trading . The Solution: The bank pays an arbitrage premium to the hedge fund. The swap is priced outside of traditional Black-Scholes boundaries. The bank intentionally sells the risk at a discount (or pays an inflated premium) to incentivize the hedge fund to absorb the un-hedgeable tail-risk.