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| {{aai|cdd|{{image|ninja showdown|png|Ninja showdown, yesterday}}}}{{c|Equity Derivatives}}After a long hiatus learning the ways of the {{eqdefs}}, the JC is back in the land of [[credit derivatives]], and has been undertaking remedial ninjery with the sacred texts of the {{cdd}}. You can learn about his travails from [[NiGEL]], in the panel to the right. | | {{essay|eqderiv|equity v credit derivatives showdown|{{image|ninja showdown|png|Ninja showdown, yesterday}}}}{{c|Credit Derivatives - Premium}} |
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| Here we do the service of comparing, in broad strokes, [[equity derivatives]] with the [[credit derivatives]].
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| ===Overview and capital structure===
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| [[Credit derivatives]] address the market value of public, quoted, usually senior unsecured debt obligations — for this discussion, let’s call them “{{cddprov|Bonds}}” while [[equity derivatives]] address the value of public, quoted common shares.
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| The instruments have very different qualities: Bonds repay principal and return income, equities return capital. Unless something really catastrophic happens, the return on a {{cddprov|Bond}} is predictable — interest and principal — and values will be as affected by prevailing interest rates as by deterioration (or improvement) in the Issuer’s creditworthiness. That one really catastrophic thing is the Issuer’s failure: its ''{{cddprov|Bankruptcy}}''.
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| Because there are literally no expectations about what they will pay — not even a redemption date — equities pogo around, depending on the issuer’s quarterly performance, paranoia, market sentiment, geopolitical currents, internet memes, Reddit, whatever Elon tweets about and whatever the madness of collected action believes to be germane to the business of, well, business. Equities could quite easily be up 200% or down 70% over a six-month period with neither making a tremendous statement as to the basic creditworthiness of the Issuer.
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| so oddly, while you would expect equities to be about corporate default and credit derivatives to be about relative performance in the absence of default, it is the other way around. Credit derivatives, like Bonds, tend to have a fixed term and while you can mutually terminate them at market price, there is no right to in the absence of a catastrophic failure. Equities tend to be exercisable at any time,
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