Asset Swapped Convertible Option Transaction - ASCOT


DEFINITION of 'Asset Swapped Convertible Option Transaction - ASCOT'

An option on a convertible bond that is used to separate a convertible bond into its two components: 1) a bond and 2) an option to acquire stock. When the bond is stripped of its conversion feature, the holder has a bond featuring fairly stable returns on debt, and a volatile - but potentially very valuable - option.

BREAKING DOWN 'Asset Swapped Convertible Option Transaction - ASCOT'

Increasingly, ASCOTs are being bought and sold by hedge funds employing convertible arbitrage strategies to increase their portfolios' leverage. Often, the bond component is broken down into small denomination bonds and sold to individual investors, while the option component is retained if the investor anticipates share price appreciation.

  1. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
  2. Convertible Bond

    A bond that can be converted into a predetermined amount of the ...
  3. Convertible Arbitrage

    A trading strategy that typically involves taking a long strategy ...
  4. Appreciation

    An increase in the value of an asset over time. The increase ...
  5. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  6. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit ...
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  1. What is a convertible bond?

    A convertible bond is a bond issued by a corporation that, unlike a regular bond, gives the bondholder the option to trade ... Read Full Answer >>
  2. Where does the stock come from when convertible bonds are converted to stock?

    First, let's define convertible bonds. A unique combination of debt and equity, they provide investors with the chance to ... Read Full Answer >>
  3. What is the difference between convertible and reverse convertible bonds?

    The difference between a regular convertible bond and a reverse convertible bond is the options attached to the bond. While ... Read Full Answer >>
  4. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  5. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  6. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>

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