Template:M intro eqderiv Uses for Equity Derivatives

So, who uses equity derivatives and why? JC would break the categories down as follows:

1. Delta-one investors: The most common trades — we are talking hundreds of billions to trillions here — are investors wishing to gain exposures to the market value of Shares and Indices as an alternative to a direct acquisition of Shares. These investors are “public” side, and for the most part investment vehicles of some kind of other: often mutual funds or hedge funds seeking to invest on margin. These trades are often called synthetic equity swaps or synthetic prime brokerage and the trades are typically very plain Equity Swaps paying the return of the Underlier Shares against a financing rate.
2. Structured product manufacturers: Next popular, in the tends of billions, are those manufacturing structured notes with exotic payoffs. This used to be more of a fund and groovy thing in the pre-GFC days, but still has its cachet in certain markets. Common structures include:
   1. Autocallables: These have two barriers: a Knock-in barrier, whereby if the Underlier exceeds the barrier the Note pays a fixed coupon, and a Knock-out barrier, whereby the Notes are automatically redeemed if the Underlier exceeds that Knock-out barrier.
   2. Reverse Convertibles: These Notes pay a high fixed coupon but redeem at the Underlier’s market price if the Underlier falls below a Knock-out barrier.
   3. Capital Protected Notes: Full or partial principal protection is guaranteed with some upside participation (usually achieved by allocating the principal proceeds into a zero-coupon bond, and any excess in the Underlier).
   4. Worst-of Notes: Notes linked to multiple Underliers, pay a significant coupon but redeem based on the performance of the worst Underlier in the Basket.
   5. Range Accruals: Notes where a coupon accrues only when the Underlier trades within specified range.
3. Strategic private investments: The smallest by far in volume but the most closely negotiated, and highest-yielding in terms of fee revenue are “strategic equity derivatives”: specific, usually private situations (pre-M&A, private stakebuilding, those wanting to take a hedged strategic position in a specific equity position using collars, puts and calls.

In each case there is a customer and a dealer providing liquidity and risk intermediation to all three categories while managing their net exposures through hedging and their own trading activities. The dealer will be the Hedging Party and you should expect the dealer to be Calculation Agent and Determining Party.