Template:How Equity Notional Reset works: Difference between revisions

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→‎How {{eqderivprov|Equity Notional Reset}} works

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-a beginner's guide to the complex and tortuous world of what happens when your Equity Notional Amount is subject to Equity Notional Reset.
+===How {{eqderivprov|Equity Notional Reset}} works===
+''Strap yourselves in, kids!''
-The short version's really quite easy. On any equity reset date, you pay the difference between the prevailing {{eqderivprov|Initial Price}} (being the {{eqderivprov|Equity Notional Amount}} as it before the reset date) and the present market value of the stock on the reset date (the {{eqderivprov|Final Price}}). You then adjust the Equity Notional Amount to be equal to that Final Price. When the next reset date rolls around, that becomes the Initial Price and you do it all over again.
+A beginner’s guide to the complex and tortuous world of what happens when your {{eqderivprov|Equity Notional Amount}} is subject to {{eqderivprov|Equity Notional Reset}}.
-The long version's a bit of a ball-breaker:
+The short version’s really quite easy: You just restrike the trade at the market value, and pay out the difference in the value of the underlier over the reset period. As follows:
-*If {{eqderivprov|Equity Notional Reset}} ({{eqderivprov|5.10}}) applies, then on each Cash Settlement Payment Date you have to adjust the Equity Notional Amount by the Equity Amount.
+*On each {{eqderivprov|Cash Settlement Payment Date}}, you pay the difference between the prevailing {{eqderivprov|Initial Price}} (being the {{eqderivprov|Equity Notional Amount}} ''before'' the [[CSPD]]) and the present market value of the stock ''on'' the [[CSPD]] (the {{eqderivprov|Final Price}}).
+*You then adjust the {{eqderivprov|Equity Notional Amount}} to be equal to that {{eqderivprov|Final Price}}.
+*When the next [[CSPD]] rolls around, the new {{eqderivprov|Equity Notional Amount}} is  the {{eqderivprov|Initial Price}} and you do it all over again.
+The long version’s a bit of a ball-breaker:
+*If {{eqderivprov|Equity Notional Reset}} ({{eqderivprov|5.10}}) applies, then on each {{eqderivprov|Cash Settlement Payment Date}} you have to adjust the {{eqderivprov|Equity Notional Amount}} by the {{eqderivprov|Equity Amount}}.
 *The {{eqderivprov|Equity Amount}} ({{eqderivprov|8.7}}) equals the {{eqderivprov|Equity Notional Amount}} times the {{eqderivprov|Rate of Return}}.
-*The {{eqderivprov|Rate of Return}} ({{eqderivprov|5.7}}) is (({{eqderivprov|Final Price}} - {{eqderivprov|Initial Price}})/{{eqderivprov|Initial Price}}) * any{{eqderivprov|Multiplier}}
+*The {{eqderivprov|Rate of Return}} ({{eqderivprov|5.7}}) is (({{eqderivprov|Final Price}} - {{eqderivprov|Initial Price}})/{{eqderivprov|Initial Price}}) * any {{eqderivprov|Multiplier}}
 *The {{eqderivprov|Final Price}} is the market value of the {{eqderivprov|Share}} on the {{eqderivprov|Valuation Date}}
 *{{eqderivprov|Initial Price}} is the price specified in the confirm (as adjusted by this glorious mechanic).
+*You pay out the {{eqderivprov|Equity Amount}} on the {{eqderivprov|Cash Settlement Payment Date}}, and adjust the {{eqderivprov|Equity Notional Amount}} accordingly.
-You pay out the equity amount, and adjust the notional accordingly. It's like converting a collateral amount into an absolute obligation by restriking.
+It’s like converting a posted [[variation margin]] into an absolute obligation by restriking the {{eqderivprov|Transaction}}.