Template:Ex amount and coronavirus: Difference between revisions

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===[[Coronavirus]] now: redux===
So what happens if you have selected {{eqderivprov|Ex Amount}} as your {{eqderivprov|Dividend Amount}} payment method, and the {{eqderivprov|Issuer}} declares a {{eqderivprov|Dividend}}, the {{eqderivprov|Record Date}} passes as expected, the {{eqderivprov|Share}} starts trading [[ex-dividend]] as, by rights, it should do. ''and then something unexpected and properly epochal happens — like [[Coronavirus|the world basically ceasing to rotate on its axis for a prolonged and indeterminate time]], prompting said issuer to ''cancel'' its dividend''. What then?
You are a counterparty to an [[equity derivative]] {{eqderivprov|Transaction}} papered under the {{eqdefs}}. Hard to imagine, I know, but just go with me. So what happens if you have selected “{{eqderivprov|Ex Amount}}” as your {{eqderivprov|Dividend Amount}} payment method, and the {{eqderivprov|Issuer}} has duly ''declared'' a {{eqderivprov|Dividend}}, the [[record date]] has passed as expected, the {{eqderivprov|Share}} has started trading [[ex-dividend]] (as by rights it ''should'' do) and ''then'' something unexpected and properly epochal happens — like ''[[Coronavirus|the world basically ceasing to rotate on its axis for a prolonged and indeterminate time]]'', prompting said issuer to ''cancel'' its dividend. What ''then''?


Judged by the lights of its basic metaphysical premise, the intention of a [[derivative]] is to, well, be ''derivative'': to replicate as closely as possible the performance of the underlying {{eqderivprov|Share}}. No equity derivative counterparty has it in its head that it is underwriting, or [[guarantee]]ing, an {{eqderivprov|Issuer}}’s commitment to pay a dividend that the {{eqderivprov|Issuer}} itself does not ultimately carry though — even if the {{eqderivprov|Issuer}} ''were'' legally obliged to perform that obligation, whereas in fact it tends not to be (however unconventional not doing so might be). So, you would think, it would be odd to find a {{eqderivprov|Transaction}} obliging an {{eqderivprov|Equity Amount Payer}} to pay a {{eqderivprov|Dividend Amount}} notwithstanding cancellation of the actual dividend on the underlying {{eqderivprov|Share}}.  
Clearly the intention of a [[derivative]] is to replicate as closely as possible the performance of the underlier. It cannot be expected that an equity derivative counterparty intends to [[guarantee]] an {{eqderivprov|Issuer}}’s obligation that the {{eqderivprov|Issuer}} itself does not ultimately perform —especially if it is not legally obliged to perform that obligation in any case (however unconventional not doing so might be) — so it would be odd to find a {{eqderivprov|Transaction}} requiring an {{eqderivprov|Equity Amount Payer}} to pay a {{eqderivprov|Dividend Amount}} notwithstanding cancellation of the actual dividend on the underlying {{eqderivprov|Issuer}}. You would expect anyone writing that kind of [[put option]] to demand quite some premium for it.


To be sure — we men and women of finance being ''[[Homo economicus|homo economici]]'' and everything, you would expect anyone writing that kind of [[put option]] to be pretty categorical about it, and to demand quite some premium for it.
Yet that is what a cold reading of the {{eqderivprov|Ex Amount}} method (if not modified by some kind of clawback) seems to do:“100% of the gross cash dividend per share declared by the {{eqderivprov|Issuer}} to holders of record of a {{eqderivprov|Share}} where the date that the {{eqderivprov|Shares}} have commenced trading “[[ex-dividend]]” on the {{eqderivprov|Exchange}} occurs during the relevant {{eqderivprov|Dividend Period}}”.


Yet a cold reading of the {{eqderivprov|Ex Amount}} method (if not modified by some kind of [[Dividend clawback|clawback]]) suggests that it what it does:
The above “cold reading” does not accord with the economic facts as market participants understand them. We suspect that common sense will prevail and no one will be cavalier enough to take this point. But you just never know.
:“''100% of the gross cash dividend per share declared by the {{eqderivprov|Issuer}} to holders of record of a {{eqderivprov|Share}} where the date that the {{eqderivprov|Shares}} have commenced trading “[[ex-dividend]]” on the {{eqderivprov|Exchange}} occurs during the relevant {{eqderivprov|Dividend Period}}''”.
 
Dunno about you, but I can’t see any contingency on actual {{eqderivprov|Issuer}} payment in there.
 
The above “cold reading” does not accord with the economic facts as market participants — ''[[Homo economicus|homo economici]]'' all — understand them. The [[JC]] suspects that common sense will prevail and no one will be cavalier enough to take this point. But you just never know, and it is a hard one to crowbar into the present law of contractual [[mistake]].

Revision as of 14:37, 30 March 2020

So what happens if you have selected Ex Amount as your Dividend Amount payment method, and the Issuer declares a Dividend, the Record Date passes as expected, the Share starts trading ex-dividend as, by rights, it should do. and then something unexpected and properly epochal happens — like the world basically ceasing to rotate on its axis for a prolonged and indeterminate time, prompting said issuer to cancel its dividend. What then?

Clearly the intention of a derivative is to replicate as closely as possible the performance of the underlier. It cannot be expected that an equity derivative counterparty intends to guarantee an Issuer’s obligation that the Issuer itself does not ultimately perform —especially if it is not legally obliged to perform that obligation in any case (however unconventional not doing so might be) — so it would be odd to find a Transaction requiring an Equity Amount Payer to pay a Dividend Amount notwithstanding cancellation of the actual dividend on the underlying Issuer. You would expect anyone writing that kind of put option to demand quite some premium for it.

Yet that is what a cold reading of the Ex Amount method (if not modified by some kind of clawback) seems to do:“100% of the gross cash dividend per share declared by the Issuer to holders of record of a Share where the date that the Shares have commenced trading “ex-dividend” on the Exchange occurs during the relevant Dividend Period”.

The above “cold reading” does not accord with the economic facts as market participants understand them. We suspect that common sense will prevail and no one will be cavalier enough to take this point. But you just never know.

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