Asset Swapped Convertible Option Transaction - ASCOT

  

Categories: Derivatives, Stocks, Bonds

Another Tom Wolfe special! (See: Asset-Backed Commercial Paper Money Market Fund Liquidity Facility)
Stocks and bonds offer different ways to invest in a company. They operate differently and have different pros and cons. Meanwhile, there are securities - called convertible bonds - that offer aspects of both types of investment. An asset swapped convertible option transaction re-separates these functions - splitting the bond and stock parts of a convertible bond.
A bond represents a loan. When you buy a bond, you are basically loaning money to a company, the grown-up version of spotting a buddy a few bucks for dinner. Eventually, hopefully, your buddy (or the company) will pay you back.
A stock, on the other hand, represents the purchase of ownership, or at least a part ownership. You aren't owed any money, as you would be with a bond, but you hope to make money as the company grows. As the company's value increases, the stock's value increases as well.
A convertible bond combines these investments. It is a bond, paying a yield and coming with a promise of repayment. However, the security also comes with an option to convert it into stock (hence the "convertible" part). So if you want, you can, under conditions laid out in the convertible bond, change the bond into a certain amount of stock at a certain price.
Here's the trade off, though: to convert into stock, you have to give up the bond. No more yield. No more guaranteed payments.
The ASCOT presents a "have your cake and eat it too" opportunity. The mechanics of the transaction are relatively complicated. But the result is splitting the bond part of the convertible bond from the stock part. You can hold the bond, with all the yield and guaranteed return, while still getting the upside available from owning stock.

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Finance: What is a swap, and what is a s...40 Views

00:00

Finance allah shmoop what is a swap And what is

00:05

a swap Shin Um can we just say it's an

00:09

option to swap You know like microsoft is a micro

00:13

computer software thing or like the electrocution is electricity and

00:17

execution or the bromance is you know brother and romance

00:22

which is something totally different when dealing with gerbils Anyway

00:25

one day a guy was holding a swap turned a

00:27

corner wasn't looking where he was going then glam o

00:30

he ran into an option What came of it was

00:32

a super hybrid type of security were in a slop

00:36

like i swap you so many dollars for so many

00:38

euros is tacked onto an option You want the ability

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to pay off your loan either in us dollars or

00:46

in euros assuming they still exist when your loan comes

00:49

due That whole brexit thing that issue have the option

00:53

to swap the flavor of payments you're making for the

00:57

hundred grand You borrowed no it's houses play out well

01:01

When the bond was issued one dollar bought you one

01:03

euro and the interest rate was eight percent So you

01:06

paid eight grand a year to rent that hundred for

01:08

ten years at which point you're going to pay it

01:11

all off simple but after five years the exchange rates

01:14

have drifted massively Magic fairy dust was sprinkled by wizards

01:18

all over europe They beat back the thirty two hour

01:21

work week Corruption unions and economic misery wrought by not

01:25

being able to compete with china russia in africa and

01:28

now amazingly the euro is a much stronger currency than

01:32

the u s dollar that's kind of a fictional story

01:34

here that we'll make enough In fact one euro buys

01:37

you two u s dollars like it when the euro

01:39

was first put out there So if you holding the

01:42

swap shin on the interest payment flavor of the hundred

01:46

grand you borrowed if you so choose you can pay

01:50

that eight grand in euros that is instead of the

01:53

eight thousand dollars a year in interest you can pay

01:56

for thousand euros It's almost a ziff your interest rate

02:00

was cut in half That's not really it's a value

02:03

is the same it's just the number of units were

02:05

cut have theirs You know that works And if you

02:07

live in europe and work in europe and we're paid

02:09

in euros Well it really is like a roman holiday

02:11

of interest rates of just want to focus on the

02:13

numbers But the values of the same there's No free 00:02:15.938 --> [endTime] lunch here even in swap shen lang

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