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{{anat|eqderiv}} | {{anat|eqderiv|{{Eqderiv short TOC}}}}Step this way into the world of [[synthetic equity swap]]s, [[contract for differences]], and all the manifold and beautiful ways uyou can take on, or lay off, exposure to a [[share]] or a [[Basket - Equity Derivatives Provision|basket]] without actually ''buying'' it. An [[equity derivative]] is a contract that ''references'' the performance of shares and share indices. They are most usually documented under {{eqdefs}}, so the place you should immediately visit is the [[JC]]’s [[Equity Derivatives Anatomy]]. | ||
An equity derivative is a | |||
[[ | “High [[delta]]” [[equity derivatives]] that replicate, one-for-one, the economic effect of cash [[equities]] trading are often called “[[synthetic equity swaps]]” or “[[synthetic prime brokerage]]”. | ||
The starting assumption is that the underlying share already exists in the market: equity derivatives are a creature of the ''[[secondary market]]''. So there’s not a lot of chat here about initial public offerings, subscription agreements and all that sort of thing. So the sorts of rights an initial subscriber might have (the {{eqderivprov|Hedging Party}}) won’t automatically translate through to the holder of a synthetic exposure under an [[equity derivative]]. | |||
The starting assumption | |||
====Types of [[equity derivative]]==== | ====Types of [[equity derivative]]==== | ||
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====Features==== | ====Features==== | ||
Equity derivatives | Equity derivatives reference the performance of the [[underlier]] over the term of the Transaction: The “{{eqderivprov|Final Price}}”) is divided by the “{{eqderivprov|Strike Price}}” (also known as “{{eqderivprov|Initial Price}}”) to yield a percentage. | ||
*'''{{eqderivprov|Strike Price}}''': | *A percentage of greater than 100% implies a ''positive'' return during {{eqderivprov|Transaction}}. | ||
*'''{{eqderivprov|Settlement Price}}''': | *A percentage of less than 100% implies a ''negative'' return. You’re [[out-of-the-money]], soldier. | ||
===Key concepts=== | |||
*'''{{eqderivprov|Strike Price}}''': the market price of the underlier at the {{eqderivprov|Trade Date}}; | |||
*'''{{eqderivprov|Settlement Price}}''': the market price of the underlier at the {{eqderivprov|Termination Date}}; | |||
*'''[[Barrier]]s''': above or below which the trade may knock in, knock out, or the settlement formula may adjust; | *'''[[Barrier]]s''': above or below which the trade may knock in, knock out, or the settlement formula may adjust; | ||
*'''{{eqderivprov|Valuation}}''': on the Settlement Date, the | *'''{{eqderivprov|Valuation}}''': on the {{eqderivprov|Settlement Date}}, the Settlement Price will be determined by reference to one or more {{eqderivprov|Valuation Date}}s, (if more than one, {{eqderivprov|Averaging}} may apply). | ||
====Market and Hedging disruption==== | ====Market and Hedging disruption==== | ||
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*'''{{eqderivprov|Hedging Disruption}}''': where the market is finctioning, but for some reason there are impediments to efficiently or legally hedging an exposure under an equity derivative. | *'''{{eqderivprov|Hedging Disruption}}''': where the market is finctioning, but for some reason there are impediments to efficiently or legally hedging an exposure under an equity derivative. | ||
{{ | {{sa}} | ||
*[[Contract for difference]] | *[[Contract for difference]] | ||
*[[Synthetic prime brokerage]] | *[[Synthetic prime brokerage]] | ||
*[[Prime brokerage transactions]] |