Index Derivatives and Equivalent Shares
Many regulators are concerned with positions in derivatives on equities, and further, positions in equities held through index derivatives or baskets/structured products. This includes index options or futures and custom baskets.
These regulatory requirements are captured by Rapptr. Positions held through indices are both shown in the Results Details screen and in the Portfolio/Entity Viewer.
This article describes the method applied to calculate the number of equivalent shares of a position if the position is held through an index future.
For background on how Equivalent Shares is calculated generally, see our article on Calculating Equivalent Shares along with this index-focused article.
The number of equivalent shares that are being calculated is the number of shares that an investor technically would be able to buy in the market, for the value of the specific issuer held through the index.
For each instrument in a construction, the equivalent shares adjustment figure is calculated. This is the value that, when multiplied by the total quantity of the position, gives the theoretical equivalent share value of that instrument in isolation.
The first step is to calculate the adjustment for the index future, which is the top level derivative in the construction. For a future, this is simply the contract size.
EquivalentSharesAdjustment (future) = ContractSize (future)
The next step is to multiply this by the equivalent shares adjustment of the index itself (the next instrument in the multilevel construction). The value of the adjustment for the index is 1 as it cannot have a contract size or conversion ratio. This value is multiplied by the future’s equivalent shares adjustment in order to obtain an accumulated adjustment factor for a given instrument, taking into account its parent instruments in the construction. . We call this accumulated factor EquivalentSharesAdjustmentCumulative.
EquivalentSharesAdjustmentCumulative (index) = EquivalentSharesAdjustment (index) * EquivalentSharesAdjustment (future)
We can now move to the next instrument(s) underlying in the construction, which are the (usually multiple) index components.
Before we determine the number of equivalent shares of a given component in an index, we need to first determine the weighting of the component as a percentage of the value of the index. In FundApps this is the ‘EffectiveWeighting.’ This data is uploaded as an instrumental component of the index. If you are providing this data as ‘Weighting’ it will simply be used as provided. If you are providing a ‘WeightingQuantity’, the number of shares represented in each index, then Rapptr will reverse calculate the ‘EffectiveWeighting’ as the WeightingQuantity (component) * Price(component) / Price(Index).
EquivalentSharesAdjustment (component) = Price (index) x EffectiveWeighting (component) / Price (component)
This figure is then factored into the equivalent shares adjustments that have been accumulated from all parent instruments as shown here:
EquivalentSharesAdjustmentCumulative (component) = EquivalentSharesAdjustment (component) * EquivalentSharesAdjustmentCumulative (index)
Finally this value is multiplied by the total quantity of the position to obtain the equivalent shares of the index component:
EquivalentShares (component) = EquivalentSharesAdjustmentCumulative (component) * Quantity(future)
The value of EquivalentShares (component) can be thought of as the component weighted number shares that can effectively be purchased via the total value of the index position held via the futures contract.
To ensure that apples and pears are not added up, all prices and hence values are converted into a common arbitrary currency if necessary (Rapptr uses USD for this purpose). This is done automatically by Rapptr and all converted values and prices are shown in the result detail screen alongside the original values.