An asset swap whose underlying is a convertible security. In terms of composition, it is a combination of an asset swap and a call option on a convertible. That is, this hybrid structure constitutes an option to buy the underlying convertible for its face value. The buyer of the convertible sells a call option on the underlying convertible to the issuer and enters into a swap under which the option buyer receives the bond coupon and pays a floating rate. The swap terminates when the call expires or is exercised. In so doing, the option buyer (in this case, the issuer) can hedge his risk by selling a call option on the same convertible to a third party.

In this sense, a convertible asset swap is a vehicle for synthetically extracting the option component of a convertible security while allowing for the transfer of the fixed-income component to another party.