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Commercial imperative: Difference between revisions
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===To gain a ''benefit'': why merchants do what they do.=== | ===To gain a ''benefit'': why merchants do what they do.=== | ||
For each party enters into a {{t|contract}} with a commercial aspiration; that all going well, that contract will yield some kind of benefit. That is it; that is the ''[[Causa sine qua non|sine qua non]]'' of entering into ''any'' [[commercial contract]]: you hope that, over time, it will help you will make money. Lots of money. If | For each party enters into a {{t|contract}} with a commercial aspiration; that all going well, that contract will yield some kind of benefit. That is it; that is the ''[[Causa sine qua non|sine qua non]]'' of entering into ''any'' [[commercial contract]]: you hope that, over time, it will help you will make money. Lots of money. If you do not, it is a dud {{t|contract}}. You should dispense with it.<ref>By terminating it on notice, rather than by exploiting legal drafting, needless to say.</ref> | ||
Assuming you have not, we can assume your {{t|contract}} indeed yields great benefit to you. Let us call the value of that benefit “X”. There are three types of X: | Assuming you have not nixed it, we can assume your {{t|contract}} indeed yields great benefit to you. Let us call the value of that benefit “X”. There are three types of X: | ||
*'''Historical X''': “Historical X” is the benefit you have ''already'' extracted from this {{t|contract}}. It will give you a comfy feeling, it brings to remind the chalet in France that you bought with it, and it may help project your expected benefit for the future, ''but for all other purposes Historical X is meaningless''. It is in the past. | *'''Historical X''': “Historical X” is the benefit you have ''already'' extracted from this {{t|contract}}. It will give you a comfy feeling, it brings to remind the chalet in France that you bought with it, and it may help project your expected benefit for the future, ''but for all other purposes Historical X is meaningless''. It is in the past. | ||
*'''Current X''': “Current X” is the value of booked and expected benefits from transactions that already exist or will arise during the non-fault [[notice period]]<ref>Being the earliest point at which your counterparty could freely terminate its obligations under the contract.</ref> of the contract'' . Think about this as “unbilled work in progress”. This is a benefit you can safely say you ''will'' earn, but have not yet. It is exciting — almost tangible — but, compared with Historical X and Future X, it will amount to bugger-all. | *'''Current X''': “Current X” is the value of booked and expected benefits from transactions that already exist or will arise during the non-fault [[notice period]]<ref>Being the earliest point at which your counterparty could freely terminate its obligations under the contract.</ref> of the contract'' . Think about this as “unbilled work in progress”. This is a benefit you can safely say you ''will'' earn, but have not yet. It is exciting — almost tangible — but, compared with Historical X and Future X, it will amount to bugger-all. | ||
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Why are you [[short an option]]? Because ''you are not entitled to Future X''. You have to persuade your client to give it to you. You cannot stop it terminating your {{t|contract}} if it so wishes. It could give all that lovely, juicy Future X to someone else. ''You should apply every fibre of your being to giving your client no earthly reason to take its business elsewhere''. In a very real sense, your future prospects depend on the continued performance of your valuable contracts.<ref>Just what to do about [[stale contract]]s, and where the parties have fallen out of affection for each other, is a subject for another article, but in a nutshell, ''shut them down''. They are the tail end of the 80 in your [[80:20 rule|80:20]] rule.</ref> | Why are you [[short an option]]? Because ''you are not entitled to Future X''. You have to persuade your client to give it to you. You cannot stop it terminating your {{t|contract}} if it so wishes. It could give all that lovely, juicy Future X to someone else. ''You should apply every fibre of your being to giving your client no earthly reason to take its business elsewhere''. In a very real sense, your future prospects depend on the continued performance of your valuable contracts.<ref>Just what to do about [[stale contract]]s, and where the parties have fallen out of affection for each other, is a subject for another article, but in a nutshell, ''shut them down''. They are the tail end of the 80 in your [[80:20 rule|80:20]] rule.</ref> | ||
===Dick moves=== | |||
Now, in the course of your relationship with your client, you may, if the fancy takes you, indulge in what your client might call “dick moves”.<ref>In fairness, your client might also do this to you. Especially if it is a hedge funds. Hedge funds are full of people who like dick moves.</ref> For example you might seek to exploit technicalities; you might insist on the literal wording of a contract notwithstanding that your commercial intention in entering it was clearly different. | |||
There are (at least) two kinds of dick moves: | |||
*'''Mistrades''': those that arise from a misconception between the parties: your expectation and your client’s about the commercial intention were different. Cheapest to deliver options in credit derivatives are this kind of dick move. Your client sees a Triple A rating eligibility criteria, and sees in it impeachable credit. You look at it and see an opportunity to dump the crappiest, most poorly risked, implausibly rated Triple A bond that you can find.<ref>Once upon a time there were plenty. They all wound up in CDO<sup>3</sup> deals.</ref> | |||
*'''Tent-peg mistrades | |||
===Legal risk=== | ===Legal risk=== | ||
At the start of your relationship, the value of the three types of X will be unknown. It is at this point that you, your counterparty, and your respective battalions of [[lawyers]] will engage in that unedifying ritual known as contract [[negotiation]]. Counsel will agonise four weeks on the potential import of the legal terms. “Does ''[[under]]'' really mean the same thing as ''[[In accordance with|pursuant to and in accordance with]]''?” This kind of thing. Most of the arguments will concern circumstances which are almost certain never to occur and, if they do, Will necessarily be utterly destructive of Future X in any case. The [[insolvency]] of the parties, for example. It is all very tedious, but those of a certain disposition seem to enjoy it. We write about them a lot on this site. | At the start of your relationship, the value of the three types of X will be unknown. It is at this point that you, your counterparty, and your respective battalions of [[lawyers]] will engage in that unedifying ritual known as contract [[negotiation]]. Counsel will agonise four weeks on the potential import of the legal terms. “Does ''[[under]]'' really mean the same thing as ''[[In accordance with|pursuant to and in accordance with]]''?” This kind of thing. Most of the arguments will concern circumstances which are almost certain never to occur and, if they do, Will necessarily be utterly destructive of Future X in any case. The [[insolvency]] of the parties, for example. It is all very tedious, but those of a certain disposition seem to enjoy it. We write about them a lot on this site. | ||