Template:How Equity Notional Reset works: Difference between revisions
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*The {{eqderivprov|Equity Amount}} ({{eqderivprov|8.7}}) equals the {{eqderivprov|Equity Notional Amount}} times the {{eqderivprov|Rate of Return}}. | *The {{eqderivprov|Equity Amount}} ({{eqderivprov|8.7}}) equals the {{eqderivprov|Equity Notional Amount}} times the {{eqderivprov|Rate of Return}}. | ||
*The {{eqderivprov|Rate of Return}} ({{eqderivprov|5.7}}) is (({{eqderivprov|Final Price}} - {{eqderivprov|Initial Price}})/{{eqderivprov|Initial Price}}) * any{{eqderivprov|Multiplier}} | *The {{eqderivprov|Rate of Return}} ({{eqderivprov|5.7}}) is (({{eqderivprov|Final Price}} - {{eqderivprov|Initial Price}})/{{eqderivprov|Initial Price}}) * any{{eqderivprov|Multiplier}} | ||
*The Final Price is the market value of the Share on the Valuation Date | *The {{eqderivprov|Final Price}} is the market value of the {{eqderivprov|Share}} on the {{eqderivprov|Valuation Date}} | ||
*Initial Price is the price specified in the confirm (as adjusted by this glorious mechanic). | *{{eqderivprov|Initial Price}} is the price specified in the confirm (as adjusted by this glorious mechanic). | ||
You pay out the equity amount, and adjust the notional accordingly. It's like converting a collateral amount into an absolute obligation by restriking. | |||
Revision as of 18:07, 14 December 2015
a beginner's guide to the complex and tortuous world of what happens when your Equity Notional Amount is subject to Equity Notional Reset.
The short version's really quite easy. On any equity reset date, you pay the difference between the prevailing Initial Price (being the Equity Notional Amount as it before the reset date) and the present market value of the stock on the reset date (the Final Price). You then adjust the Equity Notional Amount to be equal to that Final Price. When the next reset date rolls around, that becomes the Initial Price and you do it all over again.
The long version's a bit of a ball-breaker:
- If Equity Notional Reset (5.10) applies, then on each Cash Settlement Payment Date you have to adjust the Equity Notional Amount by the Equity Amount.
- The Equity Amount (8.7) equals the Equity Notional Amount times the Rate of Return.
- The Rate of Return (5.7) is ((Final Price - Initial Price)/Initial Price) * anyMultiplier
- The Final Price is the market value of the Share on the Valuation Date
- Initial Price is the price specified in the confirm (as adjusted by this glorious mechanic).
You pay out the equity amount, and adjust the notional accordingly. It's like converting a collateral amount into an absolute obligation by restriking.