A reverse convertible that entails that the holder gives up the potential upside exposure to the underlying in exchange for an enhanced coupon. The holder will not be exposed to the downside risk, unless the underlying breaches a preset barrier level. Notwithstanding, the enhanced coupon is paid (quarterly, semi-annually or annually). This means the convertible will always outperform its underlying on the downside and will also outperform if the underlying doesn’t go up by more than the coupon payment. In general, everything else is held equal, this convertible pays a lower amount of interest (coupon) than a reverse convertible without barrier, because of the so-called contingent protection or conditional capital protection provided by the barrier.
This product works well for directional markets (sideways or upside/ downside directional).
