Template:M summ Equity Derivatives 6.3(a): Difference between revisions

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===What counts as “Market Disruption”?===
The rubber meets the road in the definition of {{eqderivprov|Disrupted Day}}, whereupon you can find out what happens to your Transaction should you suffer a Market Disruption Event. These apply to Share Transactions, Basket Transactions and Index Transactions: it is least intuitive and most complicated in the case of Index transactions because, having the most underlying components, these are the ones most likely to be only ''partially'' disrupted.
A {{eqderivprov|Market Disruption Event}} is a {{eqderivprov|Trading Disruption}} or {{eqderivprov|Exchange Disruption}} that exists during the hour before any {{eqderivprov|Valuation Time}} or {{eqderivprov|Exercise Time}} — it keys off the ''occurrence'' or ''existence'' of the event, not the point when the {{eqderivprov|Calculation Agent}} determined it — or {{eqderivprov|Early Closure}}.  


The point is to capture material disruptions around the close of the market. If there ''was'' a disruption, earlier in the day but, say, it cleared up by lunchtime, then — as far as valuing [[equity derivatives]] is concerned — all is Kool and the Gang. The kinds of disruptions are:
An {{eqderivprov|Index}} is really just an glorified, overgrown dynamic {{eqderivprov|Share}} {{eqderivprov|Basket}}, whose constituents from time to time are determined by a third party “index calculation agent” according to pre-formulated index rules.
*'''{{eqderivprov|Trading Disruption}}''': suspension/limitation in trading on an underlier (or futures on it) on any {{eqderivprov|Exchange}}/{{eqderivprov|Related Exchange}}
*'''{{eqderivprov|Exchange Disruption}}''': any event that impairs the ability to value, settle transactions across any {{eqderivprov|Exchange}}/{{eqderivprov|Related Exchange}}
*'''{{eqderivprov|Early Closure}}''': the closure of any {{eqderivprov|Exchange}}/{{eqderivprov|Related Exchange}} prior to scheduled closing time unless announced at least one hour prior to the earlier of (i) the actual closing time for the regular trading session on that exchange and (ii) the submission deadline for orders on {{eqderivprov|Exchange}} for execution at the {{eqderivprov|Valuation Time}}


Additionally a day is “{{eqderivprov|Disrupted Day}}” if an {{eqderivprov|Exchange}}/{{eqderivprov|Related Exchange}} fails to open for trading during a regular trading session.
That being the case, one can’t directly hedge by buying the “{{eqderivprov|Index}}”: there is no {{eqderivprov|Index}}, in the abstract, to buy (though of course you can buy index-tracking [[ETF]]s and Index futures — though these only really push the fundamental observation down one level). At some point, to hedge the risk of a glorified, overgrown dynamic {{eqderivprov|Share} {{eqderivprov|Basket}}, someone, somewhere, has to go and buy the Shares in that basket, at the prices that the index determines, and that means having access to the markets on which those index constituents trade, at the point in time at which the index rules say one should take the price of those Shares.
 
Another oddity is that you are not necessarily trying to hit the best available price for the Share at the time of sale; you are trying to hit the ''actual price'' determined by the {{eqderivprov|Index}} Calculation Agent, however good or bad that price is. That price is usually the “official closing price” of the Exchange.
 
You cannot, of course, ever guarantee you will be able to trade at exactly the official closing price, but it helps in trying to get near it if the Exchange on which that price is determined is open at the time when that closing price is derived, is liquid, tradable, and isn’t subject to some unforeseen disruption. These are “{{eqderivprov|Market Disruption Event}}s”.

Latest revision as of 01:06, 7 August 2023

The rubber meets the road in the definition of Disrupted Day, whereupon you can find out what happens to your Transaction should you suffer a Market Disruption Event. These apply to Share Transactions, Basket Transactions and Index Transactions: it is least intuitive and most complicated in the case of Index transactions because, having the most underlying components, these are the ones most likely to be only partially disrupted.

An Index is really just an glorified, overgrown dynamic Share Basket, whose constituents from time to time are determined by a third party “index calculation agent” according to pre-formulated index rules.

That being the case, one can’t directly hedge by buying the “Index”: there is no Index, in the abstract, to buy (though of course you can buy index-tracking ETFs and Index futures — though these only really push the fundamental observation down one level). At some point, to hedge the risk of a glorified, overgrown dynamic {{eqderivprov|Share} Basket, someone, somewhere, has to go and buy the Shares in that basket, at the prices that the index determines, and that means having access to the markets on which those index constituents trade, at the point in time at which the index rules say one should take the price of those Shares.

Another oddity is that you are not necessarily trying to hit the best available price for the Share at the time of sale; you are trying to hit the actual price determined by the Index Calculation Agent, however good or bad that price is. That price is usually the “official closing price” of the Exchange.

You cannot, of course, ever guarantee you will be able to trade at exactly the official closing price, but it helps in trying to get near it if the Exchange on which that price is determined is open at the time when that closing price is derived, is liquid, tradable, and isn’t subject to some unforeseen disruption. These are “Market Disruption Events”.

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