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[[File:Slight return.jpg|left|thumb|193x193px|A [[Cash-settled - Equity Derivatives Provision|cash-settled]] [[slight return]] swap yesterday]] | |||
{{equity swaps versus forwards}} | {{equity swaps versus forwards}} | ||
=== | === Section {{eqderivprov|8.6}}: {{eqderivprov|Cash Settlement of Equity Swap Transactions}} === | ||
{{eqderivprov|Equity Swap Transaction}}s can be settled either by reference to {{eqderivprov|Price Return}} or {{eqderivprov|Total Return}}, but not [[slight return]]. | {{eqderivprov|Equity Swap Transaction}}s can be settled either by reference to {{eqderivprov|Price Return}} or {{eqderivprov|Total Return}}, but not [[slight return]]. | ||
{{cashsettlement}} | {{cashsettlement}} | ||
=== | ===Section {{eqderivprov|8.7}}: {{eqderivprov|Equity Amount}}=== | ||
{{ | {{eqderivprov|Equity Amount}}s, then. Straightforward enough: Take your {{eqderivprov|Equity Notional Amount}} — helpfully filled out in the {{eqderivprov|Confirmation}} — multiply it by the {{eqderivprov|Rate of Return}}, being the performance of the underlying share over the period in question — and there’s your number. | ||
Let’s put some numbers on this, because, as with many of the finer creations of {{icds}}, there is quite a lot of buried technology in there to unpack. | |||
The first component is the '''{{eqderivprov|Rate of Return}}'''. This is a calculation of the performance of the {{eqderivprov|Share}} over the period, times a {{eqderivprov|Multiplier}} which might apply if you are doing some kind of kooky [[leverage|leveraged]] trade, but more likely will account for capital gains or [[stamp duty]] payable by the broker on the underlying [[Hedge Position - Equity Derivatives Provision|hedge]] — so you might expect something like 85%. But that makes the mathematics too complicated for this old fellow, so let’s call the {{eqderivprov|Multiplier}} 100%, so you can ignore it, and say the {{eqderivprov|Initial Price}} is 100. And let’s do two scenarios: where the stock has gone ''up'' — here say the {{eqderivprov|Final Price}} is 105, and where the stock has gone ''down'' — here, say the {{eqderivprov|Final Price}} is 95. | |||
The {{eqderivprov|Rate of Return}} formula is ''({{eqderivprov|Final Price}} - {{eqderivprov|Initial Price}})/{{eqderivprov|Initial Price}}) * {{eqderivprov|Multiplier}}'', which works out as: | |||
*'''Where the stock went ''up''''': (105-100)/100 * 100% = 5/100 = {{font colour|green|+5%}}. | |||
*'''Where the stock went ''down''''': (95-100)/100 * 100% = -5/100 = {{font colour|red|-5%}}. | |||
Now to calculate your {{eqderivprov|Equity Amount}}, we take the {{eqderivprov|Equity Notional Amount}} (for ease of calculation, say USD1,000,000?) and times it by the {{eqderivprov|Rate of Return}}: | |||
*'''Where the stock went ''up''''': USD1,000,000 * {{font colour|green|+5%}} = USD{{font colour|green|+50,000}}. | |||
*'''Where the stock went ''down''''': USD1,000,000 * {{font colour|red|-5%}} = USD{{font colour|red|-50,000}}. | |||
===Section {{eqderivprov|8.8}}: {{eqderivprov|Cash Settlement Payment Date}} === | |||
A provision that does very little to help an inquiring mind with the question “What is the {{eqderivprov|Cash Settlement Payment Date}} actually, like, ''for''?” | |||
For that, you would be advised to consult Section {{eqderivprov|8.6}}, {{eqderivprov|Cash Settlement of Equity Swap Transactions}}, which differentiates between “{{eqderivprov|Price Return}}”, which concerns itself purely with the prevailing equity price of the underlier, and “{{eqderivprov|Total Return}}” which also factors in [[dividend]]s paid on the relevant stock, and “[[slight return]]”, which is a Jimi Hendrix song.<ref>It doesn’t really relate to [[slight return]], though that is a Jimi Hendrix song.</ref> | |||
Note: {{eqderivprov|Dividend Amount}}s are typically payable on the {{eqderivprov|Cash Settlement Payment Date}} — though the {{eqderivprov|Cash Settlement Payment Date}} following what — that is the question, whose answer, it turns out, is a little bit odd, as you will see if you investigate further. |