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But are [[synthetic equity swap]]s an odd use case? | But are [[synthetic equity swap]]s an odd use case? Aren’t other swaps more bilateral, and less “lendy” in nature? What about interest rate swaps? Surely ''paying'' a fixed rate while ''receiving'' a floating rate has none of the characteristics of borrowership and loanery about it? | ||
The first point to make here is that in the real universe, ''fixed or floating rate cashflows do exist independently''. They always come attached to an asset of some kind. They are the ''return'' on an investment of principal. In the normal, non-swappist world, to get exposure to a rate in a given “notional amount” is to make a principal investment in that amount. If you want a floating rate on a notional of a hundred bucks, you pony up a hundred bucks and buy a floating rate note. | The first point to make here is that in the real universe of actual, non-synthetic things, ''fixed or floating rate cashflows do exist independently''.<ref>Sure, you could sell a strip of coupons off your bond. Okay. But to do that, there first has to be a bond, and you have to buy it and ''cut it up''. Once you’ve done that, you have your disembodied interest cashflow, but you also have this weird, mutilated principal-only instrument ghosting around the market at a heavy discount to a fully-limbed equivalent, sort of like Weird Barbie or one of those intercised kids without a daemon in ''His Dark Materials''. </ref> They always come attached to an asset of some kind. They are the ''return'' on an investment of principal. In the normal, non-swappist world, to get exposure to a rate in a given “notional amount” is to make a principal investment in that amount. If you want a floating rate on a notional of a hundred bucks, you pony up a hundred bucks and buy a floating rate note. | ||
It was only once the [[Children of the Woods|Children of the Forest]] wrought their wristy magic on the [[First Men]] in the dark thickets of [[Bretton Woods|Woods of Bretton]] that the ways of the [[Single agreement|Single Agreement]] came into common understanding. Only then were leaden, earth-bound notions of principal swept away; the swap market took wing upon the nuclear power of infinite leverage. | It was only once the [[Children of the Woods|Children of the Forest]] wrought their wristy magic on the [[First Men]] in the dark thickets of [[Bretton Woods|Woods of Bretton]] that the ways of the [[Single agreement|Single Agreement]] came into common understanding. Only then were leaden, earth-bound notions of principal swept away; the swap market took wing upon the nuclear power of infinite leverage. | ||