Uses for Equity Derivatives

Equity Derivatives Anatomy™ →Go uptown →intro →prem →sa Resources About the Equity Derivatives Definitions | (full wikitext) | (nutshell wikitext) | Equity v credit derivatives showdown Hot topics Synthetic Prime Brokerage Anatomy | The Triple Cocktail | Cancellation and Payment | Calculation Agent TOC | 1 General Definitions | 2 Option Transactions | 3 Exercise of Options | 4 Forward Transactions | 5 Equity Swap Transactions | 6 Valuation | 7 Settlement | 8 Cash Settlement | 9 Physical Settlement | 10 Dividends | 11 Adjustments and Modifications | 12 Extraordinary Events · 12.8 Cancellation Amount · 12.9 Additional Disruption Events · 12.9 List of ADEs · 12.9(b) Consequences of ADEs | 13 Miscellaneous Index: Click ᐅ to expand: 2002 ISDA Equity Derivatives Definitions Synthetic Prime Brokerage Tell me more Sign up for our newsletter — or just get in touch: for ½ a weekly 🍺 you get to consult JC. Ask about it here.

So, who uses equity derivatives and why? JC would break the categories down as follows:

1. Delta-one investors: The most common trades — we are talking hundreds of billions to trillions here — are investors wishing to gain exposures to the market value of Shares and Indices as an alternative to a direct acquisition of Shares. These investors are “public” side, and for the most part investment vehicles of some kind of other: often mutual funds or hedge funds seeking to invest on margin. These trades are often called synthetic equity swaps or synthetic prime brokerage and the trades are typically very plain Equity Swaps paying the return of the Underlier Shares against a financing rate.
2. Structured product manufacturers: Next popular, in the tens of billions, are those manufacturing structured notes with exotic payoffs. Knock-ins, Knock-outs — in some cases even both! This used to be more of a fund and groovy thing in the pre-GFC days, but still has its cachet in certain markets. There are some examples in the premium section
3. Strategic private investments: The smallest by far in volume but the most closely negotiated, and highest-yielding in terms of fee revenue are “strategic equity derivatives”: specific, usually private situations (pre-M&A, private stakebuilding, those wanting to take a hedged strategic position in a specific equity position using collars, puts and calls.

In each case there is a customer and a dealer providing liquidity and risk intermediation to all three categories while managing their net exposures through hedging and their own trading activities. The dealer will be the Hedging Party and you should expect the dealer to be Calculation Agent and Determining Party.

Premium content Here the free bit runs out. Subscribers click 👉 here. New readers sign up 👉 here and, for ½ a weekly 🍺 go full ninja about all these juicy topics👇 Examples of structured notes

See also

• Knock-ins and Knock-outs