Template:Equity derivative charging: Difference between revisions

==Physical [[prime brokerage]]==

===Physical longs===

In a physical [[margin loan]] — representing a ''[[long]]'' equity position — the client expects two types of cost:  

*'''[[Commission]]''': The [[brokerage]] [[commission]]s it will incur from its equity broker in buying (and when it is ready to, selling again) the stock.

To offset its costs, the [[prime broker]] can [[rehypothecate]] the stock, which it holds in custody for the client. Now when it does so, the [[PB]] does not take ''[[price risk]]'' to the stock: remember; it does not have a directional view on the stock. So it will not sell the stock outright, but more likely will use it as collateral in the market, to raise cash (under a [[repo]]) or high-quality assets (under a stock loan). If the stock increases in value, happy days for all concerned: the [[PB]] will receive more cash, and at the limit may reach its rehypothecation limit and have to return some of the rehypothecated stock to the client. If the stock declines in value, the [[PB]] will be able to raise less cash against it, but will be able to call for more margin from the client.

===Physical shorts===

In a ''[[short]]'' position on margin, the [[client]] expects the following costs:

==[[Synthetic prime brokerage]]==

Under an [[equity swap]], the client never actually buys the stock, but it puts on a {{isdaprov|Transaction}} with its prime broker that replicates the economics of doing so, on margin:

===Synthetic longs===

In a ''long'' [[synthetic equity swap]] — the synthetic equivalent of a physical long, of course — the client expects two types of cost:  

*'''[[Commission]]''': The equivalent of [[brokerage]] [[commission]]s it would pay its dealer for executing the trade (and when it is ready to, terminating it).

To offset its costs, the [[swap dealer]] can raise finance against its [[Hedge Position - Equity Derivatives Provision|Hedge Position]], which it owns outright, in the repo/stock loan market. since the stock hedges its swap position, the [[dealer]] will not sell the stock outright, but  will use it as collateral in the market, to raise cash (under a [[repo]]) or high-quality assets (under a stock loan). If the stock increases in value, happy days: the [[dealer]] will get more cash, but will need that for [[variation margin]] it owes its client to the swap. If the stock declines in value, the [[dealer]] will be able to raise less cash against it, but will be able to call for more [[variation margin]] from the [[client]].

===Synthetic shorts===

In a ''short'' [[synthetic equity swap]] — the synthetic equivalent of a physical short, of course — the [[client]] expects the following costs: