(FINANCE) a financial derivative
whose underlying asset is a stock. The simplest kinds include the equity swap
and the option
As opposed to currency derivatives, interest rate derivatives, commodity derivatives, and so on. An equity swap typically involves an "equity side" of the transaction AND something else, like interest rates or oil prices.
Equity derivatives can be written on indices (e.g., the S&P 500, the FTSE-100, NASDAQ) as well as on stocks. In fact, they are often bought "out of the money
" by mutual fund
managers as insurance against a catastrophic decline in the fund value.
One other reason that poison pills are back in favor is the growth of synthetic equity derivative swap transactions, where a “short party
” agrees to pay a “long party
” the cash flows from a particular amount of a target company’s stock. In exchange, the long party agrees to pay a fee and to cover any decrease in the market value of the stock ...
Through such transactions, a long party can suddenly become a significant stockholder of a target company without warning.
--Dykema Gossett & Andrew H. Connor "The poison pill resurgence," Lexology (15 March 2010)