83,240
edits
Template:Dividends on index transactions: Difference between revisions
Template:Dividends on index transactions (view source)
Revision as of 08:57, 17 May 2022
, 17 May 2022→{{eqderivprov|Dividend}}s on {{eqderivprov|Index}} {{eqderivprov|Transaction}}s? No, sir. But yes, sir.
Amwelladmin (talk | contribs) (Created page with "==={{eqderivprov|Dividend}}s on {{eqderivprov|Index}} {{eqderivprov|Transaction}}s? ''No'', sir.=== We shouldn’t really ''need'' to say it, but we will: You don’t get {{eq...") |
Amwelladmin (talk | contribs) |
||
| (5 intermediate revisions by the same user not shown) | |||
| Line 1: | Line 1: | ||
==={{eqderivprov|Dividend}}s on {{eqderivprov|Index}} {{eqderivprov|Transaction}}s? ''No'', sir.=== | ==={{eqderivprov|Dividend}}s on {{eqderivprov|Index}} {{eqderivprov|Transaction}}s? ''No'', sir. But ''yes'', sir.=== | ||
We shouldn’t really ''need'' to say it, but we will: You don’t get | We shouldn’t really ''need'' to say it, but we will: You don’t — well ~ cough ~ ''shouldn’t'' — get [[dividend]] payments on an {{eqderivprov|Index Transaction}}. The {{eqderivprov|Index}} calculation methodology will either replicate the effect of dividend reinvestment on {{eqderivprov|Index}} constituents, by proportionately re-weighting constituents when they pay dividends — in which case you will get the effect of those dividends just through “price return” of the {{eqderivprov|Index}} level — or it ''won’t'', in which case you ''won’t'' get the effect of those dividends, BECAUSE YOU BOUGHT A DERIVATIVE OF AN INDEX THAT DOESN’T REPLICATE THE EFFECT OF ANY DIVIDENDS.<ref>The S&P 500 index, for example, does not factor in any [[dividend]] payments. Apparently.</ref> | ||
Either way, the dividend provisions of the {{eqdefs}} aren’t — well ~ cough ~ ''shouldn’t be'' — relevant to {{eqderivprov|Index}} and {{eqderivprov|Index Basket Swap Transaction}}s. So they don’t really countenance the idea of an {{eqderivprov|Index}} paying through dividends. While, in the Russian-doll [[definitions|defined terms]] schema confected by {{icds}} an {{eqderivprov|Index Swap Transaction}} is a kind of {{eqderivprov|Equity Swap Transaction}}, and therefore can have a {{eqderivprov|Type of Return}} applied to it, when you dive down the rabbit hole, through the {{eqderivprov|Total Return}} star-gate, along the {{eqderivprov|Re-investment of Dividends}} axis and into the {{eqderivprov|Dividend Amount}} portal, you hit the hard black nothingness of dark energy: A {{eqderivprov|Dividend Amount}} is defined, of course, by reference to a {{eqderivprov|Share}}’s {{eqderivprov|Record Amount}}, {{eqderivprov|Ex Amount}} or {{eqderivprov|Paid Amount}}, and not that of an {{eqderivprov|Index}}, for the compellingly straightforward reason that [[Index - Equity Derivatives Provision|Indices]] are abstract numbers. They don’t ''pay'' dividends. | |||
Now {{icds}} made a half-hearted swipe — actually, it a was more like a full-blooded, half-hour long drubbing — in one of the Pan-Asia [[MCA]]s to build in [[manufactured dividend]]s to Japanese index products, but it is fiendishly complicated, not to mention wrong-headed, and no-one uses it as far as we know. | |||
''However''. | |||
There is a fairly common market practice, for indices that ''don’t'' re-weight to replicate dividend reinvestment, for [[Dealer|dealers]] to manufacture dividends on the {{eqderivprov|Index}} constituents anyway. This is because a common means of hedging indices is by buying the underlying stocks, so since the dealer is getting the cashflows in and can pay them out. This is hard to reconcile with the drafting of the {{eqdefs}}, unless either (i) for Index transactions, you rather wilfully [[deem]] “{{eqderivprov|Share}}s” to ''mean'' “constituents of the {{eqderivprov|Index}}”, or (ii) you treat the Index Transaction as really a dynamic custom {{eqderivprov|Share Basket Swap Transaction}}. Your front office guys won’t like that suggestion, so do you know what the [[JC]]’s approach is? Just ''leave'' it. This is one of those beautiful places where the lawyers — who have only the faintest grasp of that the front office does at the best of times — do one thing, and the business — which broadly could not care a row of buttons what legal contracts say ''until it suddenly all goes Pete Tong'' — does another, ne’er the twain meet, and the respective groups carry on in blissful ignorance of the a gaping conceptual chasm between them. | |||
And speaking of gaping chasms, you [[Abyss|know what I’m going to say now]], don’t you? | |||