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Template:M summ Equity Derivatives 12.7: Difference between revisions
Template:M summ Equity Derivatives 12.7 (view source)
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====Why, if you ''must'' insist on having two {{eqderivprov|Determining Parties}}, this clause doesn’t work==== | ====Why, if you ''must'' insist on having two {{eqderivprov|Determining Parties}}, this clause doesn’t work==== | ||
This is the clincher. the co-{{eqderivprov|Determining Party}} language doesn’t work. Say we have, with heavy heart, acquiesced, and agreed two Determining Parties. Let’s further say there has been an | This is the clincher. the co-{{eqderivprov|Determining Party}} language doesn’t work. Say we have, with heavy heart, acquiesced, and agreed two {{eqderivprov|Determining Parties}}. Let’s further say there has been an {{eqderivprov|Extraordinary Event}}, such that a {{eqderivprov|Cancellation Amount}} is required. We reach for Section {{eqderivprov|12.7(c)}}. Each {{eqderivprov|Determining Party}} does its thing: the [[swap dealer]]’s sees a price of 102, and the client’s agent sees 104. | ||
Logic should say the number we are after is 103, yes? The ''average''. But that is not what Section 12.7(c) | Logic should say the number we are after is 103, yes? The ''average''. But, thought easily could have said that, that is not what Section 12.7(c) does say. | ||
{{quote|“...an amount will be payable equal to one-half of the difference between the {{eqderivprov|Cancellation Amount}} of the party with the higher {{eqderivprov|Cancellation Amount}} (“X”) and the {{eqderivprov|Cancellation Amount}} of the party with the lower {{eqderivprov|Cancellation Amount}} (“Y”) and Y shall pay it to X.”}} | {{quote|“...an amount will be payable equal to one-half of the difference between the {{eqderivprov|Cancellation Amount}} of the party with the higher {{eqderivprov|Cancellation Amount}} (“X”) and the {{eqderivprov|Cancellation Amount}} of the party with the lower {{eqderivprov|Cancellation Amount}} (“Y”) and Y shall pay it to X.”}} | ||
The difference between ''X'' and ''Y'' (104 - 102) is ''two''. ''Half'' of that difference is ''one''. | The difference between ''X'' and ''Y'' (104 - 102) is ''two''. ''Half'' of that difference is ''one''. If it is meant to yield a ''consensus'' single {{eqderivprov|Cancellation Amount}}, this, to put not too fine a point on it, is wildly, obviously, and patently ''wrong''. | ||
What could be going on? One thought we had — and it is a feeble, half-thought, so pay it little mind other than to dismiss it — is that this is meant to address a {{eqderivprov|Transaction}} where ''both'' parties are hedging separate equity risks: rather than the usual equity swap, which pays an {{eqderivprov|Equity Amount}} return against a {{isdadefprov|Floating Amount}} return, the {{eqderivprov|Transaction}} is structured as two offsetting {{eqderivprov|Equity Amount}}s. This would at least justify there being two {{eqderivprov|Determining Parties}}, and it would also justify them using the ''difference'' between the values, rather than their ''average'' — but not ''half'' the difference between the values. And we are not familiar with such swaps, which would ordinarily be achieved by writing separate long and short Transactions in any case. | |||