Template:M summ Equity Derivatives 8.7

Equity Amounts, then. Straightforward enough: Take your Equity Notional Amount — helpfully filled out in the Confirmation — multiply it by the Rate of Return, being the performance of the underlying share over the period in question — and there’s your number.

Let’s put some numbers on this, because, as with many of the finer creations of ISDA’s crack drafting squad™, there is quite a lot of buried technology in there to unpack.

The first component is the Rate of Return. This is a calculation of the performance of the Share over the period, times a Multiplier which might apply if you are doing some kind of kooky leveraged trade, but more likely will account for capital gains or stamp duty payabel by the broker on the underlying hedge — so you might expect something like 85%. But that makes the mathematics too complicated for this old fellow, so let’s call the Multiplier 100% and say the Initial Price is100.

Let’s do two scenarios: where the stock has gone up — here say the Final Price is 105, and where the stock has gone down — here, say the Final Price is 95.

The Rate of Return formula is (Final Price - Initial Price)/Initial Price) * Multiplier, which works out as:

• Where the stock went up: (105-100)/100 * 100% = 5/100 = +5%.
• Where the stock went down: (95-100)/100 * 100% = -5/100 = -5%.

Now to calculate your Equity Amount, we take the Equity Notional Amount (for ease of calculation, shall we call this 1,000,000?) and times it by the Rate of Return:

• Where the stock went up: 1,000,000 * +5% = +50,000.
• Where the stock went down: 1,000,000 * -5% = -50,000.