Payoff of Reverse Convertibles
Product description & Functionality
Reverse Convertible (RC) is based on one or more underlying assets and pays a guaranteed coupon. If the closing price of the underlying asset is above the strike price at maturity, the nominal value will be repaid in full. Otherwise, the lowest performing underlying asset will be delivered at a cost corresponding to the strike price. In this case, this leads to a significant discount compared to the starting level.
Features
If the underlying asset closes below the strike price at maturity, the underlying asset or cash settlement will be offered
If the underlying asset exceeds the strike at maturity, the nominal will be repaid
Coupons are guaranteed and paid regardless of the underlying performance
Low risk of loss compared to underlying direct investment
Some underlying assets ("worst") allow higher coupons or lower strikes, but are associated with higher risk
Maximum return is limited (cap)
Softcal vs Autocall
Softcall. If a Reverse Convertible comes with a Softcall function, the issuer of the product is able to, but does not have to, repay the nominal value (in full), plus a pro-rata coupon, on predetermined observation dates.
Autocall. If a Reverse Convertible comes with an Autocall function, the issuer of the product is obliged to repay the nominal value (in full), including a pro-rata coupon, provided that all the underlyings close above the predefined Autocall trigger.
Market Expectations
Underlying trending sideways or slightly rising
Decreasing volatility
Closing price above the strike
Advantages and Risks
Advantages
The guaranteed coupon is paid out independently of the performance of the underlyings
No barrier
Monitoring only at maturity
Limited capital protection up to the strike
Risks
Issuer exposure risk
No guaranteed capital protection
The maximum yield is limited to the coupon and no dividends are paid out