Cash Settlement of Equity Swap Transactions - Equity Derivatives Provision

Section 8.6 Cash Settlement of Equity Swap Transactions

8.6(a). Price Return

8.6(b). “Total Return” and “Re-investment of Dividends” is not applicable

8.6(c). “Total Return” and “Re-investment of Dividends” is applicable

Commentary

Equity Swap Transactions can be settled either by reference to Price Return or Total Return, but not Slight Return.

Price Return: The Price Return is the subtraction of the Settlement Price from the Initial Price, and

• (if the underlier increases in value over the life of the Transaction) be a positive number; or
• (if the underlier decreases in value over the life of the Transaction) be a negative number.

If it's positive, the Equity Amount Payer pays it tot he Equity Amount Receiver. If it's negative, the Equity Amount Receiver pays the absolute value to the Equity Amount Payer.

Total Return: The Total Return formulation is: Equity Notional Amount * (Settlement Price/Initial Price)

Since both numerator and denominator must be positive the Total Return cannot be negative, but may be greater or less than 100% (and so can be converted into a positive or negative number by subtracing from 1).