Template:M summ Equity Derivatives 12.7: Difference between revisions

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 To be clear this is no idle intellectual speculation: liquidating a hedge is not simply looking at some fantastical model dreamt up by the most delusional quant on the trading floor, arriving at some mad price that will ruin the client for nothing. ''No''. The {{eqderivprov|Hedging Party}} ''is actually long the risk''. It will have to crystallise real liability, using money from its own pocket to flatten out that risk. The amount it pays away is exactly what it will expect its client to suffer. That is the deal.<ref>Yes it is true that derivatives counterparties don’t, legally, ''have'' to hedge, but please, ladies and gentlemen: that is the academic theory. In practice, they absolutely do. The disconnect between a swap dealer’s hedge and the price of their derivative is a matter of interest for stamp-duty specialists only.</ref>
-running a synthetic equity is a boring, fraught job. The {{eqderivprov|Hedging Party}} will be ''most'' unamused if the client asks it to countenance some alternative price someone ''else'' has come up with to value its own hedge liquidation. It will, tersely, say, “Look, I know you have a great relationship with [[Wickliffe Hampton]] and everything, but I could not care a row of buttons where it sees the value of my hedge, frankly, unless it is prepared to buy my actual hedge, from me, in which case let’s go.”
+Running a synthetic equity business is mainly boring, often fraught, and on the odd occasion [[Archegos|terrifying]] job. Calculating {{eqderivprov|Cancellation Amount}}s upon market disruption counts, at least, as fraught. If the {{eqderivprov|Hedging Party}} can’t match its hedge executions with its client pricing, it will lose money. It occasionally escapes the buyside community, but this is not the idea. The dealer is does not expect to profit, or lose, from movements in the underlier: the point is to pass those onto the client, who has specifically signed up for them.
-At the point where [[Wickliffe Hampton]] does that, it is agreeing with the Hedging Party on its valuation and does not, Q.E.D. need to be co-determining party.
+Accordingly,the dealer will be ''most'' unamused if a client asks it to consider an alternative price someone ''else'' has come up with to value its own hedge liquidation. This is like saying, to a football fan, “I know Crystal Palace actually lost 2-0 to Scunthorpe United at the weekend, but my mate is a football expert, and he says Palace should have won that.”
+The dealer will, tersely, say, “Look, I know you have a great relationship with [[Wickliffe Hampton]] and everything, but I could not care a row of buttons where ''they'' sees the notional value of ''my'' hedge. ''They'' don’t have to sell it. ''I'' do. We are where we are. The price ''I'' see is X. Now if [[Wickliffe Hampton]] is prepared to make ''me'' a [[firm bid]] at Y to buy my actual hedge, from me, then I am listening. Otherwise, it is X.”
 ====But it is {{eqderivprov|Determining Party}}, not {{eqderivprov|Hedging Party}}====
-This is true: it may be yet more unnecessary over-elaboration on {{icds}}’s part — it may not have made a difference (and might have avoided this very article) had [[the ’squad]] ''not'' created an extra label, but we are where we are. It is possible, we suppose that the dealer hedges with a swap, and the actual price discovery happens away from the Hedging Party along a chain somewhere).
+The truly stubborn buy-side agitant will persist: “if this is really about who is the actual {{isdaprov|Hedging Party}}, why doesn’t it just say “{{eqderivprov|Hedging Party}}”? Why do we need a new definition of {{eqderivprov|Determining Party}}? It isn’t used for anything else.  Your beloved ’squad doesn’t make these things up for the sake of it, after all.”
+The galling fact is that we cannot explain this. Our best guess is yet more unnecessary over-elaboration on {{icds}}’s part — it may not have made a difference (and might have avoided this very article) had [[the ’squad]] ''not'' created an extra label, but we are where we are. It is possible, we suppose that the dealer hedges with a swap, and the actual price discovery happens away from the {{eqderivprov|Hedging Party}} along a chain somewhere). But that isn’t a very satisfactory answer.
 ====Why, if you ''must'' insist on having two {{eqderivprov|Determining Parties}}, this clause doesn’t work====