Template:How Equity Notional Reset works: Difference between revisions
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===How {{eqderivprov|Equity Notional Reset}} works=== | |||
''Strap yourselves in, kids!'' | ''Strap yourselves in, kids!'' | ||
A | A beginner’s guide to the complex and tortuous world of what happens when your {{eqderivprov|Equity Notional Amount}} is subject to {{eqderivprov|Equity Notional Reset}}. | ||
The short | The short version’s really quite easy: You just restrike the trade at the market value, and pay out the difference in the value of the underlier over the reset period. As follows: | ||
*On each {{eqderivprov|Cash Settlement Payment Date}}, you pay the difference between the prevailing {{eqderivprov|Initial Price}} (being the {{eqderivprov|Equity Notional Amount}} ''before'' the [[CSPD]]) and the present market value of the stock ''on'' the [[CSPD]] (the {{eqderivprov|Final Price}}). | |||
*You then adjust the {{eqderivprov|Equity Notional Amount}} to be equal to that {{eqderivprov|Final Price}}. | |||
*When the next [[CSPD]] rolls around, the new {{eqderivprov|Equity Notional Amount}} is the {{eqderivprov|Initial Price}} and you do it all over again. | |||
The long | The long version’s a bit of a ball-breaker: | ||
*If {{eqderivprov|Equity Notional Reset}} ({{eqderivprov|5.10}}) applies, then on each Cash Settlement Payment Date you have to adjust the Equity Notional Amount by the Equity Amount. | *If {{eqderivprov|Equity Notional Reset}} ({{eqderivprov|5.10}}) applies, then on each {{eqderivprov|Cash Settlement Payment Date}} you have to adjust the {{eqderivprov|Equity Notional Amount}} by the {{eqderivprov|Equity Amount}}. | ||
*The {{eqderivprov|Equity Amount}} ({{eqderivprov|8.7}}) equals the {{eqderivprov|Equity Notional Amount}} times the {{eqderivprov|Rate of Return}}. | *The {{eqderivprov|Equity Amount}} ({{eqderivprov|8.7}}) equals the {{eqderivprov|Equity Notional Amount}} times the {{eqderivprov|Rate of Return}}. | ||
*The {{eqderivprov|Rate of Return}} ({{eqderivprov|5.7}}) is (({{eqderivprov|Final Price}} - {{eqderivprov|Initial Price}})/{{eqderivprov|Initial Price}}) * any {{eqderivprov|Multiplier}} | *The {{eqderivprov|Rate of Return}} ({{eqderivprov|5.7}}) is (({{eqderivprov|Final Price}} - {{eqderivprov|Initial Price}})/{{eqderivprov|Initial Price}}) * any {{eqderivprov|Multiplier}} | ||
*The {{eqderivprov|Final Price}} is the market value of the {{eqderivprov|Share}} on the {{eqderivprov|Valuation Date}} | *The {{eqderivprov|Final Price}} is the market value of the {{eqderivprov|Share}} on the {{eqderivprov|Valuation Date}} | ||
*{{eqderivprov|Initial Price}} is the price specified in the confirm (as adjusted by this glorious mechanic). | *{{eqderivprov|Initial Price}} is the price specified in the confirm (as adjusted by this glorious mechanic). | ||
*You pay out the {{eqderivprov|Equity Amount}} on the {{eqderivprov|Cash Settlement Payment Date}}, and adjust the {{eqderivprov|Equity Notional Amount}} accordingly. | |||
It’s like converting a posted [[variation margin]] into an absolute obligation by restriking the {{eqderivprov|Transaction}}. | |||
Latest revision as of 13:03, 11 May 2022
How Equity Notional Reset works
Strap yourselves in, kids!
A beginner’s guide to the complex and tortuous world of what happens when your Equity Notional Amount is subject to Equity Notional Reset.
The short version’s really quite easy: You just restrike the trade at the market value, and pay out the difference in the value of the underlier over the reset period. As follows:
- On each Cash Settlement Payment Date, you pay the difference between the prevailing Initial Price (being the Equity Notional Amount before the CSPD) and the present market value of the stock on the CSPD (the Final Price).
- You then adjust the Equity Notional Amount to be equal to that Final Price.
- When the next CSPD rolls around, the new Equity Notional Amount is the Initial Price and you do it all over again.
The long version’s a bit of a ball-breaker:
- If Equity Notional Reset (5.10) applies, then on each Cash Settlement Payment Date you have to adjust the Equity Notional Amount by the Equity Amount.
- The Equity Amount (8.7) equals the Equity Notional Amount times the Rate of Return.
- The Rate of Return (5.7) is ((Final Price - Initial Price)/Initial Price) * any Multiplier
- The Final Price is the market value of the Share on the Valuation Date
- Initial Price is the price specified in the confirm (as adjusted by this glorious mechanic).
- You pay out the Equity Amount on the Cash Settlement Payment Date, and adjust the Equity Notional Amount accordingly.
It’s like converting a posted variation margin into an absolute obligation by restriking the Transaction.