Cash flow of reverse convertibles, Financial Management

(a) Let's presume that the firm may default only on last coupon payment date and that when this take place stock price would be less than some predetermined price K at the expiration date.

Cash flow of reverse convertibles would after that look like as follows.

2049_Cash flow of reverse convertibles.png

(b) We require a short position on the put option.

The give way on reverse convertibles are higher since their prices are less than a coupon bond with the same coupon payments.

(c) Firm decide to exercise the put option if stock price is less than say K. Consequently bond holders receive the stock when stocks have in fact fallen under adverse conditions. They most likely will prefer to cash in their shares which may further push down the stock prices.

(d) There is no principal guard in risky bonds. But this is dissimilar. Except the company defaults independent from the company's performance investors would get their principal. In the case of reverse convertibles nevertheless even if company doesn't default investor may suffer from substantial losses.

Posted Date: 7/22/2013 3:35:15 AM | Location : United States

Related Discussions:- Cash flow of reverse convertibles, Assignment Help, Ask Question on Cash flow of reverse convertibles, Get Answer, Expert's Help, Cash flow of reverse convertibles Discussions

Write discussion on Cash flow of reverse convertibles
Your posts are moderated
Related Questions
Q. Define leverage? Meaning of Leverage: - The dictionary significance of the term leverage refers to 'an increased means of accomplishing some purpose'. For instance leverage

Trading Mechanism Of Future: Flow of the Order Any person who wants to trade in futures has to contact a Futures Commission Merchant (FCM) or a broker. First, let us look

Q. What do you mean by Hedge Fund? In the easiest strategy a hedge fund borrows Hong Kong dollars (HKD) and then sells them in the market against USD that is they short the HKD

1) According to the IFE (RIP), if U.S. investors expect a 3% rate of domestic inflation over one year, and a 6% rate of inflation in European countries that use the EUR, and requir

considering the following information,what is the prise of the share as per gorden''s model?

Give two examples of types of companies that would be best able to handle high debt levels. Companies that manage local telephone service and those that manage natural gas deli

Quarterly Earnings Studies The Quarterly Earnings Studies are a part of time-series analysis. These studies aim at predicting future returns for a stock based on publicly avail

sk company had the following balance sheets and income statements over the last 3 years

a. Talk about the role of banking in business.  b. Set out the precise role played by Investment Banking and the challenges of corporate governance.

Several overseas factors are subsidiaries of UK banks or their agents who offer facilities to companies with export credit sales usually of above £0.25m. Overseas factors carry out