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Template:M intro eqderiv equity v credit derivatives showdown: Difference between revisions

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Template:M intro eqderiv equity v credit derivatives showdown (view source)

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Here we do the service of comparing, in broad strokes, [[equity derivatives]] with the [[credit derivatives]].
Here we do the service of comparing, in broad strokes, [[equity derivatives]] with the [[credit derivatives]].


Nominally just derivatives attaching to a different part of the capital structure, but don't be fooled. Almost everything about them is different.
Nominally just derivatives attaching to a different part of the capital structure, but don't be fooled. Almost everything about them is different. So, with feeling:


==Documentation==
Each has its own definitions booklet — {{eqdefs}} and {{cddefs}} respectively — though their genealogies are different.  
Each has its own definitions booklet — {{eqdefs}} and {{cddefs}} respectively — though their genealogies are different.  


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In any case, visiting credit derivatives now after a few years away, is like visiting a long lost friend now institutionalised for her own good, straight jacketed, and fed cold soup through a straw. Occasionally she still manages to shout something outrageous and upset the common room.
In any case, visiting credit derivatives now after a few years away, is like visiting a long lost friend now institutionalised for her own good, straight jacketed, and fed cold soup through a straw. Occasionally she still manages to shout something outrageous and upset the common room.
 
==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 [[Underlying|underlier]], minus the physical, reporting, funding and — maybe? — tax aspects of being on the register. You buy or sell an {{eqderiv}} ''instead of'' buying or selling the [[Underlying|underlier]].
{{Cderiv}} assume you already own the [[Underlying|underlier]], but want to hedge away a specific embedded tail risk: namely, that it blows up. While you needn’t own the underlier to buy or sell {{Cderiv}} — the [[Potts opinion]] is at great pains to stress that a [[Credit derivative|CDS]] is not an [[insurance contract]] — generally speaking you ''will'', and it ''is''.
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