Callable and Puttable Reverse Convertibles

This chapter explain callable and puttable reverse convertibles. A callable reverse convertible is a reverse convertible that can be called by the issuer at his choice at any of the pre-defined observation dates during the term of the callable reverse convertible. A puttable reverse convertible is the opposite of the callable reverse convertible in the sense that it is not the issuer but the buyer who has the choice of unwinding the reverse convertible early at the observation date of his choosing. With the puttable reverse convertible, it is the buyer who has the option to unwind the reverse convertible early, in which case the buyer sees full investment plus a part of coupons returned early. In contrast to the callable reverse convertible, the barriers are not breached if the stock price is above the barrier, however, when the stock price is below the barrier. In other words, the barriers are down-and-out rather than up-and-out.