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Template:M intro isda a swap as a loan: Difference between revisions
Template:M intro isda a swap as a loan (view source)
Revision as of 10:16, 15 December 2023
, 15 December 2023→Fixed/floating swaps
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:—{{buchstein}}, {{dsh}} | :—{{buchstein}}, {{dsh}} | ||
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Ok; that’s a delta-one equity swap. But | Ok; that’s a delta-one equity swap. But [[synthetic equity swap|synthetic prime brokerage]] is, surely, an unusual use case? | ||
Oh, sure, you could detach and sell a strip of [[coupon]]<nowiki/>s off a [[Debt security|bond]]: okay. But to do that, there must first ''be'' a bond, and you | Aren’t “''normal''” swaps truly bilateral? How about a good old fashioned [[interest rate swap]]? Surely ''paying'' a [[fixed rate]], and ''receiving'' a [[floating rate]], has none of these same characteristics of borrowership about it? | ||
The first point to make here is that in the real universe of actual, non-[[derivative]] instruments, fixed or floating rate cashflows ''do not exist independently of principal investments''. (This is just as true of [[dividend]]<nowiki/>s on equities, of course). This is because a cashflow is necessarily ''income'' on a capital investment. | |||
Oh, sure, you could detach and sell a strip of [[coupon]]<nowiki/>s off a [[Debt security|bond]]: okay. But to do that, there must first ''be'' a bond, and you must buy it, cut it up and sell the stripped bond back into the market. Once you’ve done that, you have your disembodied interest cashflow, all right — but you are left with this weird, mutilated, principal-only, [[Zero-coupon bond|zero-coupon]] instrument that you must sell into the market at a heavy discount to its fully-limbed equivalent. It will exist, but unhappily: like Weird Barbie or one of those intercised children with no daemon in ''His Dark Materials''. Once you have sold it you might not be able to see the principal investment any more, ''but it is still there''. | |||
Repeat: in the real world, ''income cashflows depend on an income-generating asset''. Stands to reason. A rate with out principal is like a shadow without a boy. | Repeat: in the real world, ''income cashflows depend on an income-generating asset''. Stands to reason. A rate with out principal is like a shadow without a boy. | ||
====Derivatives as engines of hypothesis==== | ====Derivatives as engines of hypothesis==== | ||
Do swaps change all that? No: because at some point, swaps | Do swaps change all that? No: because at some point, swaps must be ''based in the reality from which they are derived''. | ||
{{D|Derivative|/dɪˈrɪvətɪv/|n}}FINANCE: (of a product) having a value deriving from an underlying variable asset. | |||
It was only once the [[Children of the Woods|Children of the Forest]] wrought their wristy magic on the [[First Men]] in the dark thickets of [[Bretton Woods|Woods of Bretton]] that the ways of the [[Single agreement|Single Agreement]] came into common understanding. Only then were leaden, earth-bound notions of necessary principal swept away. Only then did the swap market take wing, upon the nuclear power of infinite [[leverage]]. | It was only once the [[Children of the Woods|Children of the Forest]] wrought their wristy magic on the [[First Men]] in the dark thickets of [[Bretton Woods|Woods of Bretton]] that the ways of the [[Single agreement|Single Agreement]] came into common understanding. Only then were leaden, earth-bound notions of necessary principal swept away. Only then did the swap market take wing, upon the nuclear power of infinite [[leverage]]. | ||