The reverse convertibles usually have an end date. What if during the time the barrier is triggered but at the final date of the investment the value of the asset is within the allowed area? Would invester get the full return back?
Hi Zlatan, Sorry for the belated response. Like the answer to all difficult questions it depends (on the specific provisions of the bond contract---the trust indenture). But in the vast majority of case investors would not get back the full principal (and maybe not even all of the coupon payments either). The embedded option in a reverse convertible (RC going forward) is usually a knock-in put which the bondholders are short. A knock-in (also known as barrier) option goes live once the barrier is hit (and the barrier or sometime threshold or trigger price) the option goes live. The problem for bondholders is that the barrier price is usually only 60-70% of par, but the strike price of the option. So the bondholders are effectively paying 100% of par for the underlying stock or index is usually less (say 80% of par, even if there was some price rebound after the knock-in barrier was hit). So the if the underlying stock or index is in the "allowable area" as you called it, no the bondholders get either the shares (or often cash equal to the) worth the stock or indexes current market price. Hope that explanation helps. Hit me with a follow up question if any of the above needs further clarification. Cheers, Doug
I see on swissquote they have it open end. Can i buy put one on Dow Jones and hold for several months if it djx go down will i make good profile?
top explanation.
Great video, thanks!
Hi Akshat. Thanx for the compliment. Glad you found the video informative. Cheers, Doug
The reverse convertibles usually have an end date. What if during the time the barrier is triggered but at the final date of the investment the value of the asset is within the allowed area? Would invester get the full return back?
Hi Zlatan, Sorry for the belated response. Like the answer to all difficult questions it depends (on the specific provisions of the bond contract---the trust indenture). But in the vast majority of case investors would not get back the full principal (and maybe not even all of the coupon payments either). The embedded option in a reverse convertible (RC going forward) is usually a knock-in put which the bondholders are short. A knock-in (also known as barrier) option goes live once the barrier is hit (and the barrier or sometime threshold or trigger price) the option goes live. The problem for bondholders is that the barrier price is usually only 60-70% of par, but the strike price of the option. So the bondholders are effectively paying 100% of par for the underlying stock or index is usually less (say 80% of par, even if there was some price rebound after the knock-in barrier was hit). So the if the underlying stock or index is in the "allowable area" as you called it, no the bondholders get either the shares (or often cash equal to the) worth the stock or indexes current market price. Hope that explanation helps. Hit me with a follow up question if any of the above needs further clarification. Cheers, Doug
Excellent video
Glad you liked it. Check out some of my other videos!