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Tail event: Difference between revisions
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Amwelladmin (talk | contribs) (Created page with "{{freeessay|isda|tail events|}}In the context of trading derivatives, things that (a) you didn't reasonably expect and that (b) bugger up your contract. =====Credit defaults===== A swap being a private, bilateral affair, the most obvious category of tail events is “things which mean your counterparty cannot, or will not, or has not, performed its end of the deal”. Straight out refusal to — repudiation — is rare, at least without the cloak of some kind of dispu...") Tags: Mobile edit Mobile web edit |
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=====Externalities===== | =====Externalities===== | ||
There are a category of events which make it impossible even for a solvent counterparty to perform. Change in law, for example — it is not beyond possibility that certain kinds of swaps might be restricted or outlawed altogether<ref>Not long ago the European Union proposed restricting the carbon market to “end users” to discouraged financial speculation, for example. This would have rendered certain forward contracts in {{euaprov|Allowances}} involving delivery to non-users illegal.</ref> | There are a category of events which make it impossible even for a solvent counterparty to perform. Change in law, for example — it is not beyond possibility that certain kinds of swaps might be restricted or outlawed altogether<ref>Not long ago the European Union proposed restricting the carbon market to “end users” to discouraged financial speculation, for example. This would have rendered certain forward contracts in {{euaprov|Allowances}} involving delivery to non-users illegal.</ref> or Tax events that make the transaction uneconomic as originally envisaged. | ||
Secondary events of this kind — things that limit a delaer’s ability to hedge, or materially increase its costs of doing so, tend not to be Termination Events partly this reflects a fact not often stated, but nonetheless true: there is a price at which the parties will agree to terminate any swap. Just because a party doesn't have an economic option to terminate the trade doesn't mean it can't terminate the trade. It always has an “at market” option. In liquid markets during times of fair weather this is a source of great comfort; in illiquid markets and at times of stress, less so. A dealer will say, “I will always show you a price. You just might not mind the price, is all.” | |||
Customers have less incentive to break trades if it means realising | |||