Template:M summ Equity Derivatives 8.7: Difference between revisions

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{{eqderivprov|Equity Amount}}s, then. Straightforward enough:  Take your {{eqderivprov|Equity Notional Amount}} — helpfully filled out in the {{eqderivprov|Confirmation}} — multiply it by the {{eqderivprov|Rate of Return}}, being the performance of the underlying share over the period in question — and there’s your number.


===The basics: a worked example.===
Let’s put some numbers on this, because, as with many of the finer creations of {{icds}}, there is quite a lot of buried technology in there to unpack.
The first component is the '''{{eqderivprov|Rate of Return}}'''. This is a calculation of the performance of the {{eqderivprov|Share}} over the period, times a {{eqderivprov|Multiplier}} which might apply if you are doing some kind of kooky [[leverage|leveraged]] trade, but more likely will account for capital gains or [[stamp duty]] payable by the broker on the underlying [[Hedge Position - Equity Derivatives Provision|hedge]] — so you might expect something like 85%. But that makes the mathematics too complicated for this old fellow, so let’s call the {{eqderivprov|Multiplier}} 100%, so you can ignore it, and say the {{eqderivprov|Initial Price}} is 100. And let’s do two scenarios: where the stock has gone ''up'' — here say the {{eqderivprov|Final Price}} is 105, and where the stock has gone ''down''  — here, say the {{eqderivprov|Final Price}} is 95.
The {{eqderivprov|Rate of Return}} formula is ''({{eqderivprov|Final Price}} - {{eqderivprov|Initial Price}})/{{eqderivprov|Initial Price}}) * {{eqderivprov|Multiplier}}'', which works out as:
*'''Where the stock went ''up''''':  (105-100)/100 * 100% = 5/100 = {{font colour|green|+5%}}.
*'''Where the stock went ''down''''':  (95-100)/100 * 100% = -5/100 = {{font colour|red|-5%}}.
Now to calculate your {{eqderivprov|Equity Amount}}, we take the {{eqderivprov|Equity Notional Amount}} (for ease of calculation, say USD1,000,000?) and times it by the {{eqderivprov|Rate of Return}}:
*Where the stock went ''up'': USD1,000,000 * {{font colour|green|+5%}} = USD{{font colour|green|+50,000}}.
*Where the stock went ''down'': USD1,000,000 * {{font colour|red|-5%}} = USD{{font colour|red|-50,000}}.
===Shorts, longs and flexi-transactions===
Now as you know, the {{isdama}} is a bilateral construct — In a funny way, a bit [[Bob Cunis]] like that — and while the [[equity derivatives]] market is largely conducted between dealers and their clients. This doesn’t mean the [[dealer]] is always the {{eqderivprov|Equity Amount Payer}}. The client — as often as not, a [[hedge fund]] — is as likely to be taking a [[short]] position — [[locusts]], right? — as a [[long one]]. One does this by reversing the roles of the parties in the {{eqderivprov|Confirmation}}: The {{eqderivprov|Equity Amount Payer}} for a ''long'' transaction will be a [[Swap dealer|dealer]]. The {{eqderivprov|Equity Amount Payer}} for a ''[[short]]'' transaction will be the [[Hedge fund|fund]].
So much so uncontroversial. But then there are flexi-transactions: in these modern times of [[high-frequency trading]], [[unique transaction identifier]]s and [[Trade reporting|trade]] and [[transaction reporting]], [[dealer]]s and their clients are increasingly interested in consolidating the multiple trade impulses they have on the same underlyer into single positions and single transactions: this makes reconciling reporting far easier, and also means you don’t have to be assigning thousands of [[UTI]]s every day — at a couple of bucks a throw — to what is effectively a single stock position.
What does this have to do with {{eqderivprov|Equity Notional Amount}}s? Well, the {{eqderivprov|Equity Notional Amount}} of that single “position” transaction is now a moving target. A ''short'' trade impulse on a (larger) existing long position will reduce the {{eqderivprov|Equity Notional Amount}}, but it won’t necessarily change who is the {{eqderivprov|Equity Amount Payer}}, ''unless the total notional of the position flips from positive to negative''. Then it will. This is kind of weird if you stand back and look at it from a stuffy, theoretical point of view, but once you slip into that warm negligee of pragmatism in which almost all [[legal eagles]] love to drape themselves, you get over it.
Well, I did, anyway.

Latest revision as of 08:38, 17 May 2022