From The Jolly Contrarian
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| {{ex amount and coronavirus}}So what happens if you have selected {{eqderivprov|Ex Amount}} as your {{eqderivprov|Dividend Amount}} payment method, and the {{eqderivprov|Issuer}} declares a {{eqderivprov|Dividend}}, the {{eqderivprov|Record Date}} passes as expected, the {{eqderivprov|Share}} starts trading [[ex-dividend]] as, by rights, it should do. ''and then something unexpected and properly epochal happens — like [[Coronavirus|the world basically ceasing to rotate on its axis for a prolonged and indeterminate time]], prompting said issuer to ''cancel'' its dividend''. What then?
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| Clearly the intention of a [[derivative]] is to replicate as closely as possible the performance of the underlier. It cannot be expected that an equity derivative counterparty intends to [[guarantee]] an {{eqderivprov|Issuer}}’s obligation that the {{eqderivprov|Issuer}} itself does not ultimately perform —especially if it is not legally obliged to perform that obligation in any case (however unconventional not doing so might be) — so it would be odd to find a {{eqderivprov|Transaction}} requiring an {{eqderivprov|Equity Amount Payer}} to pay a {{eqderivprov|Dividend Amount}} notwithstanding cancellation of the actual dividend on the underlying {{eqderivprov|Issuer}}. You would expect anyone writing that kind of [[put option]] to demand quite some premium for it.
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| Yet that is what a cold reading of the {{eqderivprov|Ex Amount}} method (if not modified by some kind of clawback) seems to do: :“100% of the gross cash dividend per share declared by the {{eqderivprov|Issuer}} to holders of record of a {{eqderivprov|Share}} where the date that the {{eqderivprov|Shares}} have commenced trading “[[ex-dividend]]” on the {{eqderivprov|Exchange}} occurs during the relevant {{eqderivprov|Dividend Period}}”.
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| The above “cold reading” does not accord with the economic facts as market participants understand them. We suspect that common sense will prevail and no one will be cavalier enough to take this point. But you just never know.
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Latest revision as of 09:11, 17 May 2022