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.

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RELATED FAQS
  1. What is a 'busted' convertible bond?

    Learn about busted convertible bonds; these are hybrid securities with conversion prices significantly higher than the market ... Read Answer >>
  2. How is convertible bond valuation different than traditional bond valuation?

    Read about bond valuation, particularly the differences between how a traditional bond is valued and how a convertible bond ... Read Answer >>
  3. Why do some investors prefer convertible over “straight” bonds?

  4. What are 'death spiral' convertible bonds?

    Conventional convertible bonds give the bondholder the right to exchange the bond for a certain amount of the issuer's common ... Read Answer >>
  5. What is a Chinese hedge?

    A Chinese Hedge is a form of arbitrage by which an investor shorts a convertible bond and buys the underlying common stock. ... Read Answer >>
  6. What does it mean when a bond has a put option?

    A put option on a bond is a provision that allows the holder of the bond the right to force the issuer to pay back the principal ... Read Answer >>
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