Replacement cost

The ISDA Master Agreement The Jolly Contrarian holds forth™ →Go Premium intro sa Resources and Navigation Index: Click ᐅ to expand: ISDA Navigation The Varieties of ISDA Experience Subject 2002 (wikitext) 1992 (wikitext) 1987 (wikitext) Preamble Pre Pre Pre Interpretation 1 1 1 Obligns/Payment 2 2 2 Representations 3 3 3 Agreements 4 4 4 EODs & Term Events 5 Events of Default FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events Illegality • Tax Event • TEUM • CEUM • ATE • 5 Events of Default FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events Illegality • Tax Event • TEUM • CEUM • ATE • 5 Events of Default FTPD • Breach • CSD • Misrep • DUST • Cross Default • Bankruptcy • MWA Termination Events Illegality • FM • Tax Event • TEUM • CEUM • ATE • Early Termination 6 Early Termination ET right on EOD • ET right on TE • Effect of Designation • Calculations 6 Early Termination ET right on EOD • ET right on TE • Effect of Designation • Calculations • Set-off 6 Early Termination ET right on EOD • ET right on TE • Effect of Designation • Calculations • Set-off Transfer 7 7 7 Contractual Currency 8 8 8 Miscellaneous 9 9 9 Offices; Multibranch Parties 10 10 10 Expenses 11 11 11 Notices 12 12 12 Governing Law 13 13 13 Definitions 14 14 14 Schedule Schedule Schedule Schedule Termination Provisions Part 1 Part 1 Part 1 Tax Representations Part 2 Part 2 Part 2 Documents for Delivery Part 3 Part 3 Part 3 Miscellaneous Part 4 Part 4 Part 4 Other Provisions Part 5 Part 5 Part 5 Index: Click ᐅ to expand: Essays

A fundamental principle of derivatives trading is that, by entering a Transaction, you forever change your exposure to the risk it represents. You go from off-risk to on-risk, or vice versa. How to value that risk between times may be hard to know until it finally crystallises, under its terms, into a “settlement obligation” — whereupon you must make or receive delivery or payment of some kind.

By nature, financial risks fluctuate in unpredictable and maddening ways. But while the value of your risk position, once traded, may change, the fact that you have the risk position does not.

This might seem trite, but it is often misunderstood, especially when further down the line, something prevents settlement.

A derivative position seems a rather nebulous thing in the abstract. Before it expires, it does not feel as if the world has changed. In the same way, until the roulette ball has settled its slot, it feels as if a bet placed upon it should be cancellable: this is all very hypothetical, no-one has changed their position in reliance on a still-spinning wheel, yet, so why should a punter not be allowed to back out of the wager, and keep her stake?

This is not how casinos see it, of course. Nor do swaps dealers.

This is quite