82,891
edits
Equity v credit derivatives showdown: Difference between revisions
no edit summary
Amwelladmin (talk | contribs) No edit summary Tags: Mobile edit Mobile web edit |
Amwelladmin (talk | contribs) No edit summary |
||
| Line 14: | Line 14: | ||
Part of the lack of popularity is the sheer complication of the {{cddefs}}. Unlike the {{eqdefs}}, the 2003 Credit Derivatives Definitions really didn’t work, the move away was propelled by regulator angst and infrastructural imperative, so there was not the option of flat-out ignoring them, as the market did to the ill-fated [[2011 Equity Derivatives Definitions]]. | Part of the lack of popularity is the sheer complication of the {{cddefs}}. Unlike the {{eqdefs}}, the 2003 Credit Derivatives Definitions really didn’t work, the move away was propelled by regulator angst and infrastructural imperative, so there was not the option of flat-out ignoring them, as the market did to the ill-fated [[2011 Equity Derivatives Definitions]]. | ||
==Synthetic investment versus loss insurance== | ==Synthetic investment versus loss insurance== | ||
{{ | {{Eqderiv}} are means of gaining exposure — positive or negative— to an instrument without owning it. The basic point of the contract is to replicate exactly the economic features of the underlier, minus the physical, reporting and funding aspects of being on the register. You buy or sell an {{eqderiv}} ''instead of'' buying or selling the underlier. | ||
Credit derivatives assume you already own the underlier, but want to hedge away a specific embedded tail risk: namely that it | Credit derivatives assume you already own the underlier, but want to hedge away a specific embedded tail risk: namely that it | ||
| Line 20: | Line 20: | ||
==Overview and capital structure== | ==Overview and capital structure== | ||
{{cderiv}} 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. | |||
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}}''. | 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}}''. | ||