Equity derivative

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Equity Derivatives Anatomy™

Article 1. Certain General Definitions
Article 2. General Terms Relating to Option Transactions
Article 3. Exercise of Options
Article 4. General Terms Relating to Forward Transactions
Article 5. General Terms Relating to Equity Swap Transactions
Article 6. Valuation
Article 7. General Terms Relating to Settlement
Article 8. Cash Settlement
Article 9. Physical Settlement
Article 10. Dividends
Article 11. Adjustments and Modifications Affecting Indices, Shares and Transactions
Article 12. Extraordinary Events
Article 13. Miscellaneous

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Step this way into the world of synthetic equity swaps, contract for differences, and all the manifold and beautiful ways uyou can take on, or lay off, exposure to a share or a 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 2002 ISDA Equity Derivatives Definitions, so the place you should immediately visit is the JC’s Equity Derivatives Anatomy.

“High deltaequity 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 Hedging Party) won’t automatically translate through to the holder of a synthetic exposure under an equity derivative.

Types of equity derivative


Equity derivatives reference the performance of the underlier over the term of the Transaction: The “Final Price”) is divided by the “Strike Price” (also known as “Initial Price”) to yield a percentage.

  • A percentage of greater than 100% implies a positive return during Transaction.
  • A percentage of less than 100% implies a negative return. You’re out-of-the-money, soldier.

Key concepts

Market and Hedging disruption

  • Market Disruption: Contingency plans need to be made for what to do where it is not possible to make a valuation on any day on which one might be required (these may occur periodically through the transaction, and may be daily).
  • 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.

See also