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Template:M intro isda a swap as a loan: Difference between revisions
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{{smallcaps|[[a swap as a loan|During]] a typically}} [[The bilaterality, or not, of the ISDA|turgid disquisition]] about the ostensible “bilaterality” of the {{isdama}}, the JC remarked rashly that despite ''looking like'' a bilateral, even-stevens, un-[[loansome]] sort of a thing, in practical fact most swaps are ''implied financing arrangements''. | {{smallcaps|[[a swap as a loan|During]] a typically}} [[The bilaterality, or not, of the ISDA|turgid disquisition]] about the ostensible “bilaterality” of the {{isdama}}, the JC remarked rashly that despite ''looking like'' a bilateral, even-stevens, un-[[loansome]] sort of a thing, in practical fact most swaps are ''implied financing arrangements''. | ||
Hotly justifying this stance sidetracked the original article, so we have “[[Let’s take it offline|taken things offline]]” and started a whole new article where the JC can properly make a tit of himself without spoiling | Hotly justifying this stance sidetracked the original article, so we have “[[Let’s take it offline|taken things offline]]” and started a whole new article where the JC can properly make a tit of himself without spoiling a perfectly pointless ululation about [[The bilaterality, or not, of the ISDA|Party A and Party B]]. | ||
To recap the background to that post: | To recap the background to that post: | ||
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Aren’t “''normal''” swaps truly bilateral? How about a good old fashioned [[interest rate swap]]? Surely ''paying'' a [[fixed rate]], and ''receiving'' a [[floating rate]], has none of these same characteristics of borrowership about it? | Aren’t “''normal''” swaps truly bilateral? How about a good old fashioned [[interest rate swap]]? Surely ''paying'' a [[fixed rate]], and ''receiving'' a [[floating rate]], has none of these same characteristics of borrowership about it? | ||
The first point to make here is that in the real universe of actual, non-[[derivative]] instruments, fixed or floating rate cashflows ''do not exist independently of principal investments''. (This is just as true of [[dividend]]<nowiki/>s on equities, of course). This is because a cashflow is necessarily ''income'' on a capital investment. | The first point to make here is that in the real universe of actual, non-[[derivative]] instruments, fixed or floating rate cashflows ''do not exist independently of principal investments''. (This is just as true of [[dividend]]<nowiki/>s on equities, of course). This is because a cashflow is necessarily ''income'' on a capital investment. | ||
Oh, sure, you could detach and sell a strip of [[coupon]]<nowiki/>s off a [[Debt security|bond]]: okay. But to do that, there must first ''be'' a bond, and you must buy it, cut it up and sell the stripped bond back into the market. Once you’ve done that, you have your disembodied interest cashflow, all right — but you are left with this weird, mutilated, principal-only, [[Zero-coupon bond|zero-coupon]] instrument that you must sell into the market at a heavy discount to its fully-limbed equivalent. It will exist, but unhappily: like Weird Barbie or one of those intercised children with no daemon in ''His Dark Materials''. Once you have sold it you might not be able to see the principal investment any more, ''but it is still there''. | Oh, sure, you could detach and sell a strip of [[coupon]]<nowiki/>s off a [[Debt security|bond]]: okay. But to do that, there must first ''be'' a bond, and you must buy it, cut it up and sell the stripped bond back into the market. Once you’ve done that, you have your disembodied interest cashflow, all right — but you are left with this weird, mutilated, principal-only, [[Zero-coupon bond|zero-coupon]] instrument that you must sell into the market at a heavy discount to its fully-limbed equivalent. It will exist, but unhappily: like Weird Barbie or one of those intercised children with no daemon in ''His Dark Materials''. Once you have sold it you might not be able to see the principal investment any more, ''but it is still there''. | ||
Repeat: in the real world, ''income cashflows depend on an income-generating asset''. Stands to reason. A rate with out principal is like a shadow without a boy. | Repeat: in the real world, ''income cashflows depend on an income-generating asset''. Stands to reason. A rate with out principal is like a shadow without a boy. | ||