Dilution or Concentration Event - Equity Derivatives Provision: Difference between revisions

{{a|eqderiv|}}Variations on the unwieldy phrase “a diluting or concentrative effect on the theoretical value of the relevant Shares” appears seven times in the {{eqdefs}}, which is more than enough.  The issue is this: you strike an equity swap at a given price, reflecting the prevailing capital value of the shares in question, but expressed by reference to a ''number'' of Shares. Say, 1,000 Tesla shares. It being a delta-one product off goes your swap dealer, buys 1000 Tesla Shares,<ref>Or there’s a [[give in]] or whatever.</ref> strikes your swap at that price, and we are in business. If the shares go up, so does your swap, and the swap dealer remains perfectly hedged.

But remember this is a [[derivative contract]] —  a special, sacred and non-Euclidean thing, floating free of the grubby world of actual shares — and the one thing we know about derivative contracts is that therefore they do not link directly through to a hedge. They reference 1000 ''hypothetical'' Shares, so it does not matter whether your [[swap dealer]] actually holds shares as a hedge — I mean, it will, but it doesn’t have to — or mis-hedges: it still has to pay you the return on 1000 Tesla shares.