Template:M intro eqderiv Uses for Equity Derivatives: Difference between revisions

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Created page with "So, who uses equity derivatives and why? JC would break the categories down as follows:{{L3}} '''Delta-one investors''': The most common trades — we are talking hundreds of billions to trillions here — are investors wishing to gain exposures to the market value of {{eqderivprov|Shares}} and {{eqderivprov|Indices}} as an alternative to a direct acquisition of Shares. These investors are “public” side, and for the most part investment vehicles of some kind of other..."
 
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So, who uses equity derivatives and why? JC would break the categories down as follows:{{L3}} '''Delta-one investors''': The most common trades — we are talking hundreds of billions to trillions here — are investors wishing to gain exposures to the market value of {{eqderivprov|Shares}} and {{eqderivprov|Indices}} as an alternative to a direct acquisition of Shares. These investors are “public” side, and for the most part investment vehicles of some kind of other: often [[mutual fund]]s or [[hedge fund]]s seeking to invest on margin. These trades are often called [[synthetic equity swap]]s or [[synthetic prime brokerage]] and the trades are typically very plain Equity Swaps paying the return of the {{eqderivprov|Underlier}} Shares against a financing rate.<li>
So, who uses equity derivatives and why? JC would break the categories down as follows:{{L3}} '''Delta-one investors''': The most common trades — we are talking hundreds of billions to trillions here — are investors wishing to gain exposures to the market value of {{eqderivprov|Shares}} and {{eqderivprov|Indices}} as an alternative to a direct acquisition of Shares. These investors are “public” side, and for the most part investment vehicles of some kind of other: often [[mutual fund]]s or [[hedge fund]]s seeking to invest on margin. These trades are often called [[synthetic equity swap]]s or [[synthetic prime brokerage]] and the trades are typically very plain Equity Swaps paying the return of the {{eqderivprov|Underlier}} Shares against a financing rate.<li>
'''Structured product manufacturers''': Next popular, in the tends of billions, are those manufacturing structured notes with exotic payoffs. This used to be more of a fund and groovy thing in the pre-[[GFC]] days, but still has its cachet in certain markets. Common structures include:{{L4}}
'''Structured product manufacturers''': Next popular, in the tens of billions, are those manufacturing structured notes with exotic payoffs. {{eqderivprov|Knock-in}}s, {{eqderivprov|Knock-out}}s — in some cases even both! This used to be more of a fund and groovy thing in the pre-[[GFC]] days, but still has its cachet in certain markets. There are some examples in the premium section <li>
'''Autocallables''': These have two barriers: a {{eqderivprov|Knock-in}} barrier, whereby if the {{eqderivprov|Underlier}} exceeds the barrier the Note pays a fixed coupon, and a {{eqderivprov|Knock-out}} barrier, whereby the Notes are automatically redeemed if the {{eqderivprov|Underlier}} exceeds that Knock-out barrier.<li>
'''Reverse Convertibles''': These Notes pay a high fixed coupon but redeem at the {{eqderivprov|Underlier}}’s market price if the {{eqderivprov|Underlier}} falls below a {{eqderivprov|Knock-out}} barrier.<li>
'''Capital Protected Notes''': Full or partial principal protection is guaranteed with some upside participation (usually achieved by allocating the principal proceeds into a zero-coupon bond, and any excess in the {{eqderivprov|Underlier}}).<li>
'''Worst-of Notes''': Notes linked to multiple {{eqderivprov|Underlier}}s, pay a significant coupon but redeem based on the performance of the worst Underlier in the Basket. <li>
'''Range Accruals''': Notes where a coupon accrues only when the {{eqderivprov|Underlier}} trades within specified range.</ol><li>
'''Strategic private investments''': The smallest by far in volume but the most closely negotiated, and highest-yielding in terms of fee revenue are “[[strategic equity derivatives]]”: specific, usually private situations (pre-M&A, private stakebuilding, those wanting to take a hedged strategic position in a specific equity position using collars, puts and calls. </ol>
'''Strategic private investments''': The smallest by far in volume but the most closely negotiated, and highest-yielding in terms of fee revenue are “[[strategic equity derivatives]]”: specific, usually private situations (pre-M&A, private stakebuilding, those wanting to take a hedged strategic position in a specific equity position using collars, puts and calls. </ol>
In each case there is a customer and a [[dealer]] providing liquidity and risk intermediation to all three categories while managing their net exposures through hedging and their own trading activities. The dealer will be the {{eqderivprov|Hedging Party}} and you should expect the dealer to be {{eqderivprov|Calculation Agent}} and {{eqderivprov|Determining Party}}.
In each case there is a customer and a [[dealer]] providing liquidity and risk intermediation to all three categories while managing their net exposures through hedging and their own trading activities. The dealer will be the {{eqderivprov|Hedging Party}} and you should expect the dealer to be {{eqderivprov|Calculation Agent}} and {{eqderivprov|Determining Party}}.

Latest revision as of 11:46, 27 December 2024

So, who uses equity derivatives and why? JC would break the categories down as follows:

  1. Delta-one investors: The most common trades — we are talking hundreds of billions to trillions here — are investors wishing to gain exposures to the market value of Shares and Indices as an alternative to a direct acquisition of Shares. These investors are “public” side, and for the most part investment vehicles of some kind of other: often mutual funds or hedge funds seeking to invest on margin. These trades are often called synthetic equity swaps or synthetic prime brokerage and the trades are typically very plain Equity Swaps paying the return of the Underlier Shares against a financing rate.
  2. Structured product manufacturers: Next popular, in the tens of billions, are those manufacturing structured notes with exotic payoffs. Knock-ins, Knock-outs — in some cases even both! This used to be more of a fund and groovy thing in the pre-GFC days, but still has its cachet in certain markets. There are some examples in the premium section
  3. Strategic private investments: The smallest by far in volume but the most closely negotiated, and highest-yielding in terms of fee revenue are “strategic equity derivatives”: specific, usually private situations (pre-M&A, private stakebuilding, those wanting to take a hedged strategic position in a specific equity position using collars, puts and calls.

In each case there is a customer and a dealer providing liquidity and risk intermediation to all three categories while managing their net exposures through hedging and their own trading activities. The dealer will be the Hedging Party and you should expect the dealer to be Calculation Agent and Determining Party.

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