A Convertible Asset Substitution Option Transaction, or ASCOT, is a way of separating the fixed income and equity components from a convertible bond.
ASCOT is built by selling an American call option on the convertible bond issuer’s shares at an exercise price that takes into account the cost of unwinding the strategy.
ASCOTs allow investors to eliminate credit risk on convertibles and provide opportunities for convertible arbitrage strategies.
A collar is an options strategy that involves buying a put option down and selling a put option up, which is used to protect against large losses but also cap large profits up.
A full ratchet is an anti-dilution provision that applies the lowest selling price as the option’s adjusted price or conversion rate to existing shareholders.
The interest rate collector uses option contracts to hedge interest rate risk to protect floating rate borrowers from rate hikes or lenders from falling rates in the event of a reverse collar.
A long straddle is an option strategy that involves buying both a long call and a long put on the same underlying asset with the same expiration date and strike price.
The option-adjusted spread (OAS) measures the difference in yield between a bond with an embedded option, such as an MBS or callable, and the yield on a Treasury bond.