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Barrier Reverse Convertible Coupons and Embedded Put Value

Article Quant Q&A · Author: whaddaplaya
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Summary

The document explores how an issuer might set the coupon on a barrier reverse convertible (BRC), a structured product with a comparatively high stated payment. It proposes that the coupon may be linked to the value of the embedded down-and-in put on the underlying asset, and asks how volatility and the put strike could affect that value and the resulting coupon.

It also asks whether the option premium and coupon are connected, and how that relationship works. The material contains no answer, pricing formula, numerical example, or evidence about issuer pricing practice. It therefore frames a useful valuation question rather than establishing a specific coupon-setting method. A complete analysis would need to account for the product's terms and issuer economics, which the document does not describe.

Key ideas

  • A BRC coupon may be related to the value of its embedded down-and-in put.
  • Changes in volatility or strike can affect the embedded option's value.
  • The document asks how an option premium translates into a coupon but does not provide a formula.
  • No pricing evidence or issuer-specific methodology is included.

Tags

OptionsDerivatives pricingVolatility
Full text
# How does the issuer of a Barrier Reverse Convertible determine the coupon?


# How does the issuer of a Barrier Reverse Convertible determine the coupon?












I am looking into BRC's, and I keep reading about their relatively high coupon rates which are pre-determined by the issuer. However, I can't seem to find any good resources on HOW they pre-determine the coupon rate.

It seems to be strongly related to the valuation of the down-and-in put option on the underlying asset, as higher volatility or lower strike prices would influence the coupon rate, but I can not seem to figure out how exactly.

Additionally, if my above assumption is correct, am I right in assuming the option premium and coupon rate are related? Again, if so, how are they related?

Thanks.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.