Reverse Convertible

The holder of a reverse convertible gives up the potential upside exposure to the underlying asset in exchange for an enhanced fixed coupon. The holder of the product remains exposed to the downside risk of the underlying asset if it breaks through a predefined downside barrier set at the inception of the product.

The enhanced coupon of the reverse convertible is paid even if the underlying asset breaks through the barrier. The coupon may be paid quarterly, semi-annually or annually.  This payment of coupons coupled with  downside exposure only occurring when the underlying asset breaks through the barrier means the product may outperform its underlying asset on the downside.  The product may also outperform on the upside if the underlying asset doesn't rise by more than the coupon.  The ideal market scenario for a reverse convertible is the prospect of a sideways trending market.