Template:Capsule equity derivative dividend payments: Difference between revisions

The point of a derivative is to replicate, as closely as possible, the economics of its reference asset. Not only does electing {{eqderivprov|Ex Amount}} or {{eqderivprov|Record Amount}} introduce ''arbitrary<ref> arbitrary because it is totally dependent on whether the [[ex date]] falls in the same {{eqderivprov|Dividend Period}} as the actual payment date, which in turn will be a function of the registrar’s schedule and nothing to do with the Issuer.</ref> timing'' “[[basis]]” between the derivative and its underlying security, it also potentially introduces ''credit'' “[[basis]]”, because an underlying issuer which has ''[[Declaration date|declared]]'' a dividend may not ultimately be able to pay it — if it has become [[insolvent]] in the meantime, which could be a period of months. Now ''some'' timing basis between a [[derivative]] and its underlying is inevitable — the derivative payment will lag the underlying payment<ref>And note the {{eqdefs}} envisages {{eqderivprov|Dividend Amount}}s being paid on the {{eqderivprov|Cash Settlement Payment Date}}, which is at the end of the {{eqderivprov|Dividend Period}} — though many users ignore that and adopt a “pay-when-paid” approach, regardless of what the definitions say.</ref> — but ''[[credit]]'' basis is certainly not. ''Derivatives are not meant to guarantee the performance of the underlying securities they reference''.<ref>Okay I realise that seems not to be true for [[credit derivatives]]. But even there, the credit protection “buyer” is effectively ''short'' the derivative exposure. It is simply confused because in the classic case, the protection “seller” was an investor ''buying'' a [[CDO]] which is an instrument which securitises a short [[credit derivative]].</ref> In fact, that is utterly antithetical to the very definition of the word “derivative”.