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Template:M summ Equity Derivatives 5: Difference between revisions
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'''{{eqderivprov|Rate of Return}}''': Used in calculating the {{eqderivprov|Equity Amount}}, which is the amount you pay our on a {{eqderivprov|Cash Settlement Payment Date}}. | '''{{eqderivprov|Rate of Return}}''': Used in calculating the {{eqderivprov|Equity Amount}}, which is the amount you pay our on a {{eqderivprov|Cash Settlement Payment Date}}. | ||
'''{{eqderivprov|Initial Price}}''': Used in {{eqderivprov|Rate of Return}}, which in turn is used in {{eqderivprov|Equity Amount}}, and also very relevant to the {{eqderivprov|Equity Notional Reset}} process. The {{eqderivprov|Initial Price}} is different to the {{eqderivprov|Equity Notional Amount}} in that it is expressed as a price ''per {{eqderivprov|Share}}'', whereas the {{eqderivprov|Equity Notional Amount}} tends to be {{eqderivprov|Initial Price}} * {{eqderivprov|Number of Shares}}. | |||
Note there is an ''initial'' {{eqderivprov|Initial Price}} — the strike price in the {{isdaprov|Confirmation}} — but it is reset on every {{eqderivprov|Valuation Date}} to the {{eqderivprov|Final Price}} on that date — so the ''prevailing'' {{eqderivprov|Initial Price}} fluctuates over time. | |||
The way the {{eqderivprov|Initial Price}} definition is drafted, you don’t need to say “... subject to adjustment on each {{eqderivprov|Valuation Date}}” in the {{isdaprov|Confirmation}}, although for many of you this is sure to prove an irresistible temptation. | |||
'''{{eqderivprov|Final Price}}''': [[Final Price - Equity Derivatives Provision|Note]] that {{eqderivprov|Final Price}} isn’t necessary the ''final'' {{eqderivprov|Final Price}}: you determine a fresh {{eqderivprov|Final Price}} on every {{eqderivprov|Valuation Date}}, as of the {{eqderivprov|Valuation Time}}, and they feed into the {{eqderivprov|Cash Settlement}} (or {{eqderivprov|Equity Notional Reset}}) process, whereby one party pays out the movement price of the underlier over the period since the last {{eqderivprov|Valuation Date}}. | |||
Thus, {{eqderivprov|Final Price}} for today’s {{eqderivprov|Valuation Date}} becomes the {{eqderivprov|Initial Price}} for the ''next'' {{eqderivprov|Valuation Date}}, and so on and so on — yesterday’s rooster is today’s feather duster so to say. | |||
Only on the ''final'' {{eqderivprov|Final Price}} does the {{eqderivprov|Transaction}} terminate and that contingency — you know, calling it quits and wrapping the whole thing up — isn’t addressed in any particular way in the definitions booklet, the presumption being that you will just follow the same procedure as you would for any other Valuation Date on the last one. This might give your US Tax guy the heebie-jeebies, be warned, as {{sex|he}} will want [[VWAP]], or some kind of [[Hypothetical broker-dealer|hypothetical broker dealer]] referenced in the very last one. Dash cold water in his face if so, and tell him to ''get it together, man''. | |||
===={{eqderivprov|Final Price}} in [[Synthetic prime brokerage]]==== | |||
Where you are doing [[synthetic equity swap]]s, the {{eqderivprov|Final Price}} on the {{isdadefsprov|Termination Date}} — the very one which gives your [[Tax lawyer|tax guy]] the heebie-jeebies — is mainly of academic interest, as it will only be a jowl-slappingly fortuitous coincidence if a client happens to go off risk at exactly the scheduled {{isdadefsprov|Termination Date}}. | |||
In fact, a [[synthetic equity swap]] is an indefinite arrangement — it is replicating cash [[prime brokerage]], remember, where a fellow holds (or shorts) a security at {{sex|her}} own pleasure, so to speak — so the client can terminate at any time, and if it doesn’t terminate by the scheduled {{isdadefsprov|Termination Date}} she will typically want to roll the position (if she can<ref>There are complicated [[US Tax]] rules at play here</ref>) without realising a gain or loss. Thus the {{isdadefsprov|Termination Date}} is fairly arbitrary, existing really only to avoid syntax errors in a booking system which will insist on you inputting one, or to resolve the unspoken anguish of your financial reporting folk who may otherwise fear you have an undated exposure to the underlying security<ref>Not, in fact true, as the [[broker-dealer]] will almost certainly have a right to terminate on (a month or more’s) notice, but do not expect this to placate a [[Financial reporting|financial controller]].</ref>. | |||
'''{{eqderivprov|Equity Notional Reset}}''': The {{eqderivprov|Equity Notional Reset}} is a feature for automatically restriking the {{eqderivprov|Equity Notional Amount}} on a periodic basis to its prevailing value. It has the effect of converting posted [[collateral]] — which for financial institutions may suffer a punitive [[Regulatory capital|capital treatment]] — into realised profit and loss; and therefore no longer contingent liabilities to pay cash amounts. | |||
Am equity swap will reset automatically on each [[Cash Settlement Payment Date - Equity Derivatives Provision|Cash Settlement Payment Date]], (i.e., usually a {{eqderivprov|Settlement Cycle}} after each {{eqderivprov|Valuation Date}}). | |||