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Template:M summ Equity Derivatives 6.3(a): Difference between revisions
Template:M summ Equity Derivatives 6.3(a) (view source)
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An {{eqderivprov|Index}} is really just an glorified, overgrown dynamic {{eqderivprov|Share Basket}}, whose constituents from time to time are determined by a third party “index calculation agent” according to pre-formulated index rules. | An {{eqderivprov|Index}} is really just an glorified, overgrown dynamic {{eqderivprov|Share}} {{eqderivprov|Basket}}, whose constituents from time to time are determined by a third party “index calculation agent” according to pre-formulated index rules. | ||
That being the case, one can’t directly hedge by buying the “{{eqderivprov|Index}}”: there is no {{eqderivprov|Index}}, in the abstract, to buy (though of course you can buy index-tracking [[ETF]]s and Index futures — though these only really push the fundamental observation down one level). At some point, to hedge the risk of a glorified, overgrown dynamic {{eqderivprov|Share Basket}}, someone, somewhere, has to go and buy the Shares in that basket, at the prices that the index determines, and that means having access to the markets on which those index constituents trade, at the point in time at which the index rules say one should take the price of those Shares. | That being the case, one can’t directly hedge by buying the “{{eqderivprov|Index}}”: there is no {{eqderivprov|Index}}, in the abstract, to buy (though of course you can buy index-tracking [[ETF]]s and Index futures — though these only really push the fundamental observation down one level). At some point, to hedge the risk of a glorified, overgrown dynamic {{eqderivprov|Share} {{eqderivprov|Basket}}, someone, somewhere, has to go and buy the Shares in that basket, at the prices that the index determines, and that means having access to the markets on which those index constituents trade, at the point in time at which the index rules say one should take the price of those Shares. | ||
Another oddity is that you are not necessarily trying to hit the best available price for the Share at the time of sale; you are trying to hit the ''actual price'' determined by the {{eqderivprov|Index}} Calculation Agent, however good or bad that price is. That price is usually the “official closing price” of the Exchange. | Another oddity is that you are not necessarily trying to hit the best available price for the Share at the time of sale; you are trying to hit the ''actual price'' determined by the {{eqderivprov|Index}} Calculation Agent, however good or bad that price is. That price is usually the “official closing price” of the Exchange. | ||