Averaging - Equity Derivatives Provision

2002 ISDA Equity Derivatives Definitions A Jolly Contrarian owner’s manual™ Resources and navigation Resources About the Equity Derivatives Definitions | (full wikitext) | (nutshell wikitext) | Equity v credit derivatives showdown Hot topics Synthetic Prime Brokerage Anatomy | The Triple Cocktail | Cancellation and Payment | Calculation Agent Resources About the Equity Derivatives Definitions | (full wikitext) | (nutshell wikitext) | Equity v credit derivatives showdown Hot topics Synthetic Prime Brokerage Anatomy | The Triple Cocktail | Cancellation and Payment | Calculation Agent TOC | 1 General Definitions | 2 Option Transactions | 3 Exercise of Options | 4 Forward Transactions | 5 Equity Swap Transactions | 6 Valuation | 7 Settlement | 8 Cash Settlement | 9 Physical Settlement | 10 Dividends | 11 Adjustments and Modifications | 12 Extraordinary Events · 12.8 Cancellation Amount · 12.9 Additional Disruption Events · 12.9 List of ADEs · 12.9(b) Consequences of ADEs | 13 Miscellaneous Index: Click ᐅ to expand: Equity Derivatives - Premium Synthetic Prime Brokerage Paragraph 6.7 in a Nutshell™ Use at your own risk, campers! 6.7. Averaging. If Averaging Dates are specified, then the following provisions will apply for any Valuation Date: 6.7(a) “Averaging Date” means, for each Valuation Date, each date so specified (or, if it is not a Scheduled Trading Day, the following Scheduled Trading Day). 6.7(b) Settlement Price and Final Price. The Settlement Price or Final Price for a Valuation Date will be: (i) Index Transactions and Cash-settled Share Transactions: The average of the Relevant Prices of the Index or the Shares on each Averaging Date; (ii) Index Basket Transactions: The average for the Basket the Calculation Agent determines using the method set out in the Confirmation at the Valuation Time on each Averaging Date or, if not so set out, the average for the Baskets it determines on the Averaging Date as the sum of Relevant Prices for each Index in the Basket; and (iii) Cash-settled Share Basket Transactions: The average of the Baskets the Calculation Agent determines using the method set out in the Confirmation at the Valuation Time on each Averaging Date or, if not so set out, the average of the Baskets it determines on the Averaging Date as the sum of each Share determined as Relevant Price x Number of Shares. 6.7(c) Averaging Date Disruption. If any Averaging Date is a Disrupted Day, then, if the specified consequence for "Averaging Date Disruption” is: 6.7(c)(i) “Omission”, then the Averaging Date will not be relevant when determining the Settlement Price or Final Price. If as a result there would be no Averaging Date on that Valuation Date, Section 6.6 will apply when determining the relevant level on the final Averaging Date for that Valuation Date as if it were a disrupted Valuation Date; 6.7(c)(ii) “Postponement”, then Section 6.6 will apply when determining the relevant level on that Averaging Date as if it were a disrupted Valuation Date whether or not the deferred Averaging Date would fall on a date that already is an Averaging Date; or 6.7(c)(iii) “Modified Postponement”, then: (A) Index Transactions and Share Transactions: The Averaging Date will be the next Valid Date, though if one has not occurred by the Valuation Time on the eighth Scheduled Trading Day following the originally disrupted Averaging Date or Disrupted Day: (1) that eighth Scheduled Trading Day will be the Averaging Date (even if it is already an Averaging Date), and (2) the Calculation Agent will determine the relevant level for that Averaging Date per Section 6.6; (B) Index Basket Transactions or Share Basket Transactions: the Averaging Date for each unaffected Index or Share will be as specified in the Confirmation as an Averaging Date for tat Valuation Date and the Averaging Date for a disrupted Index or Share will be the next Valid Date for the Index or Share. However if the next Valid Date for the Index or Share has not occurred by the Valuation Time on that eighth following Scheduled Trading Day then: (1) that eighth Scheduled Trading Day will be the Averaging Date (even if it is already an Averaging Date) and (2) the Calculation Agent will determine the relevant level under Section 6.6; and (C) “Valid Date” means an undisrupted Scheduled Trading Day on which another Averaging Date for the same Valuation Date does not occur. 6.7(d) Adjustments of the Exchange-traded Contract. If any Exchange-traded Contract terms are changed by the Exchange, the Calculation Agent must adjust any variable relevant to Transaction settlement as necessary to preserve the economic equivalent of all payments by the parties under the Transaction that would have been required following that change. 6.7(e) Adjustments to Indices. If an Index Modification or Index Cancellation occurs by, or an Index Disruption occurs on an Averaging Date under any Index Transaction or Index Basket Transaction, then the Index Adjustment Events under Section 11.1(b) will apply. view template Full text of Paragraph 6.7 Section 6.7. Averaging. If Averaging Dates are specified in the related Confirmation, then notwithstanding any other provisions of these Definitions, the following provisions will apply to the valuation of the relevant Index, Share or Basket in respect of a Valuation Date: 6.7(a) Averaging Date. “Averaging Date” means, in respect of each Valuation Date, each date specified or otherwise determined as provided in the related Confirmation (or, if such date is not a Scheduled Trading Day, the next following Scheduled Trading Day). 6.7(b) Settlement Price and Final Price. For purposes of determining the Settlement Price or the Final Price, as the case may be, in respect of a Valuation Date, the Settlement Price or the Final Price will be: (i) in respect of an Index Transaction or Cash-settled Share Transaction, the arithmetic mean of the Relevant Prices of the Index or the Shares on each Averaging Date; (ii) in respect of an Index Basket Transaction, the arithmetic mean of the amounts for the Basket determined by the Calculation Agent as provided in the related Confirmation as of the relevant Valuation Time(s) on each Averaging Date or, if no means for determining the Settlement Price or the Final Price are so provided, the arithmetic mean of the amounts for the Basket calculated on each Averaging Date as the sum of the Relevant Prices of each Index comprised in the Basket (weighted or adjusted in relation to each Index as provided in the related Confirmation); and (iii) in respect of a Cash-settled Share Basket Transaction, the arithmetic mean of the amounts for the Basket determined by the Calculation Agent as provided in the related Confirmation as of the relevant Valuation Time(s) on each Averaging Date or, if no means for determining the Settlement Price or the Final Price are so provided, the arithmetic mean of the amounts for the Basket calculated on each Averaging Date as the sum of the values calculated for the Shares of each Issuer as the product of (A) the Relevant Price of such Share and (B) the relevant Number of Shares comprised in the Basket. 6.7(c) Averaging Date Disruption. If any Averaging Date is a Disrupted Day, then, if under "Averaging Date Disruption” the consequence specified in the related Confirmation is: 6.7(c)(i) “Omission”, then such Averaging Date will be deemed not to be a relevant Averaging Date for purposes of determining the relevant Settlement Price or Final Price. If through the operation of this provision no Averaging Date would occur with respect to the relevant Valuation Date, then Section 6.6 will apply for purposes of determining the relevant level, price or amount on the final Averaging Date in respect of that Valuation Date as if such final Averaging Date were a Valuation Date that was a Disrupted Day; 6.7(c)(ii) “Postponement”, then Section 6.6 will apply for purposes of determining the relevant level, price or amount on that Averaging Date as if such Averaging Date were a Valuation Date that was a Disrupted Day irrespective of whether, pursuant to such determination, that deferred Averaging Date would fall on a date that already is or is deemed to be an Averaging Date for the Transaction; or 6.7(c)(iii) “Modified Postponement”, then: (A) in the case of an Index Transaction or a Share Transaction, the Averaging Date shall be the first succeeding Valid Date. If the first succeeding Valid Date has not occurred as of the Valuation Time on the eighth Scheduled Trading Day immediately following the original date that, but for the occurrence of another Averaging Date or Disrupted Day, would have been the final Averaging Date in respect of the relevant Scheduled Valuation Date, then (1) that eighth Scheduled Trading Day shall be deemed the Averaging Date (irrespective of whether that eighth Scheduled Trading Day is already an Averaging Date), and (2) the Calculation Agent shall determine the relevant level or price for that Averaging Date in accordance with Section 6.6; (B) in the case of an Index Basket Transaction or a Share Basket Transaction, the Averaging Date for each Index or Share not affected by the occurrence of a Disrupted Day shall be the date specified in the Confirmation as an Averaging Date in respect of the relevant Valuation Date and the Averaging Date for an Index or Share affected by the occurrence of a Disrupted Day shall be the first succeeding Valid Date in relation to such Index or Share. If the first succeeding Valid Date in respect of such Index or Share has not occurred as of the Valuation Time on the eighth Scheduled Trading Day immediately following the original date that, but for the occurrence of another Averaging Date or Disrupted Day, would have been the final Averaging Date in relation to the relevant Scheduled Valuation Date, then (1) that eighth Scheduled Trading Day shall be deemed to be the Averaging Date (irrespective of whether that eighth Scheduled Trading Day is already an Averaging Date) in respect of such Index or Share, and (2) the Calculation Agent shall determine the relevant level, price or amount for that Averaging Date in accordance with Section 6.6; and (C) “Valid Date” shall mean a Scheduled Trading Day that is not a Disrupted Day and on which another Averaging Date in respect of the relevant Valuation Date does not or is not deemed to occur. 6.7(d) Adjustments of the Exchange-traded Contract. Without duplication of Section 11.1 (which shall govern in the event of any conflict), in the event that the terms of the Exchange-traded Contract are changed or modified by the Exchange, the Calculation Agent shall, if necessary, adjust one or more of the Strike Price, the Number of Options, the Initial Price, the Forward Price, the Forward Floor Price, the Forward Cap Price, the Knock-in Price, the Knock-out Price and/or any other variable relevant to the settlement terms of the Transaction to preserve for each party the economic equivalent of any payment or payments (assuming satisfaction of each applicable condition precedent) by the parties in respect of the Transaction that would have been required after the date of such change. 6.7(e) Adjustments to Indices. If (i) on or prior to any Averaging Date in respect of an Index Transaction or Index Basket Transaction an Index Modification or Index Cancellation occurs, or (ii) on any Averaging Date in respect of an Index Transaction or Index Basket Transaction an Index Disruption occurs, then the consequence specified in respect of Index Adjustment Events for the purpose of Section 11.1(b) shall apply to such Index Transaction or Index Basket Transaction. view template 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.

Content and comparisons

Article 6. Valuation

Section 6.1. Valuation Time
Section 6.2. Valuation Date
Section 6.3. General Terms Relating to Market Disruption Events

6.3(a) Market Disruption Event

6.3(b) Trading Disruption

6.3(c) Exchange Disruption

6.3(d) Early Closure

Section 6.4. Disrupted Day
Section 6.5. Scheduled Valuation Date
Section 6.6. Consequences of Disrupted Days
Section 6.7. Averaging

6.7(a). Averaging Date

6.7(b). Settlement Price and Final Price

6.7(c). Averaging Date Disruption

6.7(d). Adjustments of the Exchange-traded Contract

6.7(e). Adjustments to Indices (Averaging)

Section 6.8. Futures Price Valuation

6.8(a) Valuation Date (Futures Price Valuation)

6.8(b) Additional definitions (Futures Price Valuation)

6.8(c) Settlement Price and Final Price (Futures Price Valuation)

6.8(d) Adjustments of the Exchange-traded Contract (Futures Price Valuation)

6.8(e) Non-Commencement or Discontinuance of the Exchange-traded Contract

6.8(f) Corrections of the Official Settlement Price

Template

Summary

If you are in the business of trading equities, one thing you might worry about is your own lousy timing. If the point at which you decided to trade out of your position, there just happened to be some transient oompah that sent the market crazily higher, or lower, you might wind up closing out your position, or just being margined on it, at a bad price because, them’s the breaks.

Now the sort of fellow who is active in the market and trades a lot ought to be able to make peace with this risk, because it naturally irons itself out: most days, you’ll get a fair price; somedays you’ll be freakily to the bad, other days, freakily to the good. It is just the cost, as B.B. King would say, of bein’ the boss.

However: those of a more paranoid mien, or who who truck in less liquid, more fat-fingery stocks and want to build that ironing-out feature into individual position valuations, there is this idea of averaging. More importantly, it is the standard method for valuing and closing out US equity derivatives, because it is mostly likely to keep your tax people jumpy, who worry about re-characterising high-delta equity derivatives as disguised cash equity trades: de-linking your price from anything conceivably hedgeable helps with that. As to this see volume-weighted average price, being the market-preferred method of achieving that.

Except where mandated by US tax, expect brokers to be less than keen about averaging precisely because it is difficult to accurately hedge, and also it is a faff.

Template

See also

• Valuation generally under Section 6.

Template