Reverse Convertible
A fixed coupon in every case; the nominal is repaid only if the underlying ends at or above the strike.
Payoff at maturity
Move the parameters; the product formula and its building blocks are recomputed from the same engine that is tested against the workbook.
- Product
Redemption 108 %
Per 10'000 of nominal
| Underlying at maturity | Level | Redemption | Amount | Gain / loss |
|---|---|---|---|---|
| −30 % | 70 % | 78 % | 7'800 | −2'200 |
| unchanged | 100 % | 108 % | 10'800 | +800 |
| +30 % | 130 % | 108 % | 10'800 | +800 |
Coupons are shown as paid at maturity together with the nominal. Costs, taxes and the price you paid are not included.
Data table and formulas
Reverse Convertible (1220): redemption at maturity for an underlying at 0 % → 8 %; 8 % → 16 %; 100 % → 108 %; 200 % → 108 % of its initial level.
| Series | Formula | 0 % | 25 % | 50 % | 75 % | 100 % | 125 % | 150 % | 175 % | 200 % |
|---|---|---|---|---|---|---|---|---|---|---|
| Zero Bond | 100 + coupon | 108 | 108 | 108 | 108 | 108 | 108 | 108 | 108 | 108 |
| Short Put - ATM | −(100 ÷ strike × max(strike − S, 0)) | -100 | -75 | -50 | -25 | 0 | 0 | 0 | 0 | 0 |
| Product | if S ≥ strike: 100 + coupon; otherwise 100 × S ÷ strike + coupon | 8 | 33 | 58 | 83 | 108 | 108 | 108 | 108 | 108 |
Largest difference between the sum of the blocks and the product formula over the grid: 3.6e-15.
How it is built
Each block drawn on its own, then added. The last chart is the sum, and it is identical to the product line above.
- Zero Bond100 + coupon
- Short Put - ATM−(100 ÷ strike × max(strike − S, 0))
- Productif S ≥ strike: 100 + coupon; otherwise 100 × S ÷ strike + coupon
Largest gap between the sum of the blocks and the product formula on this grid: 3.6e-15. The same identity is tested for every product and scenario in the site's test suite.
Construction, as listed in the workbook
- Zero Bond (face = nominal + coupon)
- Short Put - ATM
In plain English
You lend the nominal to the issuer and at the same time sell it a put on the underlying. The premium from the put is what makes the coupon much higher than a bond coupon. If the underlying ends at or above the strike, the put expires worthless and you receive the nominal plus the coupon.
If it ends below the strike, the issuer exercises the put: you receive the underlying (or its cash value) instead of the nominal, plus the coupon. The short put is scaled so that the delivery is worth nominal × underlying ÷ strike.
Chances and risks
Chances
- A high, unconditional coupon.
- Outperforms a direct investment in a sideways market.
- Simple to understand.
Risks
- No capital protection below the strike.
- The coupon is the maximum gain, whatever the underlying does.
- Issuer credit risk.
Who it fits
- Investors who expect a flat market and are comfortable owning the underlying if it falls.
Who it does not fit
- Investors expecting a strong rise (the coupon caps you) or a strong fall.
Features that can be added
Cross-category features from the workbook that issuers attach to this type.
Nearby on the map
- 1200Yield Enhancement ProductsDiscount Certificate
The underlying bought at a discount, in exchange for giving up gains above a cap. - 1210Yield Enhancement ProductsDiscount Certificate with Barrier
A discount certificate that repays the cap in full as long as the barrier is never touched.Barrier - 1230Yield Enhancement ProductsBarrier Reverse Convertible
A reverse convertible with a safety barrier: the nominal is repaid unless the barrier was touched and the underlying ends below the strike.Barrier - 1255Yield Enhancement ProductsReverse Convertible with Conditional Coupon
A reverse convertible whose coupon is paid only when the underlying is above a trigger on the observation date; usually with early redemption. - 1260Yield Enhancement ProductsBarrier Reverse Convertible with Conditional Coupon
The barrier reverse convertible with conditional coupons and, usually, an autocall.Barrier