Glossary

A common feature of reverse convertibles is the addition of a barrier or knock-in level. This is usually set at a level below the initial level of the underlying share or index. In this case the option only exists if the underlying first falls to this barrier level and “knocks-in” otherwise the capital is returned in full at maturity in all cases.

Another feature which is common in reverse convertibles linked to individual shares, is that at maturity if the share has fallen, the investor simply receives the share outright instead of a reduced amount of his original investment. This is economically equivalent but from the investors perspective, receipt of the share means that they will automatically gain from any subsequent rise in the share price after the maturity of the product.

Finally, some products of this type will provide a floor on the price of the underlying. This means that the risk to capital is effectively limited beyond a pre-determined fall in the underlying so that the investor is not faced with a potentially limitless loss to capital at maturity.