Equity Derivatives - How To Discuss
Equity Derivatives
Jerome Kerviel lost €4.9bn (£3.7bn) trading them, and outsiders may have two questions. How can a simple bet turn into a loss of this magnitude? And how can fun and games in the esoteric world of derivatives shake up modest stock markets?
Anyone who has ever bet on the spread knows the answer to the first question. The rule for spread betting is simple: the more you get right, the more you win, the more you get wrong, the more you lose.
Suppose you are optimistic about the prospects of England cricket teams against Australia. Bookmakers estimate that it will be difficult for England to make 300 runs and the spread will be 290,300. You are buying this contract meaning you will earn a multiple of your stake for every 300+ points scored. Betting £10 on 1 race doesn't sound like much, does it?
But if England are knocked out in 200 they will have lost 100, the difference between 300 and 200 runs multiplied by their £10 stake. This is a loss of €1,000.
Kerviel's office was similar. He bet that all three major stock indices, the French Cac 40, the German Dax and the pan-European EuroStoxx 50, would rise. And the more they raised, the more the bet won.
We know what happened next. Chervil was advised against and SocGen decided that the positions should be closed. At that point, the loss would have been £1.5bn, which is the best indicator in our sport, if he had turned on the radio over lunch to find England 874.
SocGens executives face a classic business dilemma: cut losses or push through and hope things get better? In practice there was no choice. Kerviel's position was so strong that SocGen bet on the company. For example, if the markets another 30%, your very survival is at stake.
Literal Meanings of Equity Derivatives
Equity:
Meanings of Equity:
Fairness, fairness, or fairness, as defined in the light of natural law or law.
Various related meanings from the Court of Chancery in late medieval England.
Different values associated with power.
Derivatives:
Meanings of Derivatives:
Something distracted.
One word is derived from another.
A financial instrument whose value depends on the valuation of the underlying asset, such as a warrant, an option, etc.
One chemical is derived from another.
Derivative of the function ( at some point on the curve f(x)).
The value of this function is given by the value of its independent variable.
