Equity v credit derivatives showdown

Credit Derivatives Anatomy™ Ninja showdown, yesterday From our machine overlords Here is what, NiGEL, our cheeky little GPT3 chatbot had to say when asked to explain: JC: Nigel, tell me a story about a boy who journeyed to a high mountain to train at the feet of an isda ninja for ten years to become a black belt in equity derivatives. NiGEL: The boy was fascinated by the stories of the ISDA ninjas, the elite warriors who mastered the art of equity derivatives. He dreamed of becoming one of them and learning their secrets. He saved up enough money to travel to the high mountain where their dojo was located. He knocked on the door and asked to be accepted as a disciple. The master of the dojo looked at him with a stern gaze and said, “Becoming an ISDA ninja is no game. It is a way of life. You will have to train hard, study hard, and endure many hardships. You will have to forsake your family, your friends, your credibility and your worldly possessions.” The boy said, “Master. I am ready.” The master smiled and said, “Very well. Come in. You are now one of us.” The boy entered the dojo and began his training. He learned how to use as OSLAs, GMSLAs, CFDs, and of course equity swaps. He learned how to fight with his bare hands, using synthetics, lockups, delta-hedges, and close-outs. He learned how to move stealthily, evade NAV triggers, and escape from short squeezes. He learned how to meditate, control his margining, and focus his mind. But most importantly, he learned how to trade equity derivatives. He learned how to analyze the market, calculate the risks and rewards, and execute the best strategies. He learned how to use options, futures, swaps, and other complex instruments. He learned how to hedge his positions, arbitrage opportunities, and exploit inefficiencies. He learned how to deal with volatility, liquidity, and leverage. He studied the ISDA Master Agreement, the standard contract that governed all equity derivative transactions. He memorised it and the 2002 ISDA Equity Derivatives Definitions and all their clauses, definitions, and provisions. He understood its implications, interpretations, and applications. He knew how to handle Events of Default, Termination Events, close-out netting, and collateral management. He passed all the tests and challenges that the master gave him. He earned the respect and admiration of his fellow disciples. He rose through the ranks and achieved higher levels of skill and knowledge. After ten years of training, he was ready for his final test. The master summoned him to his chamber and said, "You have done well, my son. You have learned everything I have taught you. You have proven yourself worthy of being an ISDA ninja. There is only one thing left for you to do." "What is it, master?" the boy asked. "You must face me in a martial swaps showdown," the master said. “It is a duel between two ISDA ninjas, each using their own chosen derivatives definitions booklet as a weapon. I choose the 2014 ISDA Credit Derivatives Definitions. You may chose the 2002 ISDA Equity Derivatives Definitions.We will each choose a portfolio of swaps with different underlying assets, maturities, notional amounts, and fixed or floating rates. We will then exchange cash flows based on these swaps until one of us runs out of money or concedes defeat." "It is exciting," the master said, "but also dangerous. If you lose, you will lose everything you have worked for: your ninja status. Your honour. Your dignity. Your implausibly generous income. And your mortal soul will be cast into — ” “What, Master?” the boy asked. “What? Where will my mortal soul be cast?” The master hesitated. But them the boy understood. It was a place unmentionable to the sworn warriors of the Aïessdiyé. "This is the ultimate test of your skill and courage. This is how we determine who is the best among us." "Then I accept your challenge," the boy said. "Good," the master said. "Prepare yourself. We will meet at dawn in the derelict warehouse where we store our old equipment." The next morning, the boy went to the warehouse with his portfolio of swaps. He saw the master waiting for him with his own portfolio. They bowed to each other and began their showdown. They traded swap after swap with lightning speed and precision. They matched each other's moves with counter-moves. They tried to outsmart each other with clever tactics and tricks. view template Disclaimer: NiGEL’s a neural network, he drinks a lot, and he spends too much time on the internet, so if you listen to anything he has to say you only have yourself to blame. Come to think of it, that is also true of the JC in general. Resources (full wikitext) | (nutshell wikitext) | Anatomy | Narrowly-tailored credit event | Equity v credit derivatives showdown Index: Click ᐅ to expand: Credit Derivatives Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here. Premium version of this page

After a long hiatus learning the ways of the 2002 ISDA Equity Derivatives Definitions, the JC is back in the land of credit derivatives, and has been undertaking remedial ninjery with the sacred texts of the 2014 ISDA Credit Derivatives Definitions. You can learn about his travails from NiGEL, in the panel to the right.

Here we do the service of comparing, in broad strokes, equity derivatives with the credit derivatives.

Overview and capital structure

Credit derivatives address the market value of public, quoted, usually senior unsecured debt obligations — for this discussion, let’s call them “Bonds” while equity derivatives address the value of public, quoted common shares.

The instruments have very different qualities: Bonds repay principal and return income, equities return capital. Unless something really catastrophic happens, the return on a Bond is predictable — interest and principal — and values will be as affected by prevailing interest rates as by deterioration (or improvement) in the Issuer’s creditworthiness. That one really catastrophic thing is the Issuer’s failure: its Bankruptcy.

Because there are literally no expectations about what they will pay — not even a redemption date — equities pogo around, depending on the issuer’s quarterly performance, paranoia, market sentiment, geopolitical currents, internet memes, Reddit, whatever Elon tweets about and whatever the madness of collected action believes to be germane to the business of, well, business. Equities could quite easily be up 200% or down 70% over a six-month period with neither making a tremendous statement as to the basic creditworthiness of the Issuer.

so oddly, while you would expect equities to be about corporate default and credit derivatives to be about relative performance in the absence of default, it is the other way around. Credit derivatives, like Bonds, tend to have a fixed term and while you can mutually terminate them at market price, there is no right to in the absence of a catastrophic failure. Equities tend to be exercisable at any time,