THE EQONEX CRYPTO GUIDE AND LEARN HUB
Eqonomics

Structured Products Explained: How to Use a Reverse Convertible

April 1, 2022

Adam Wise

Structured Products Explained: How to Use a Reverse Convertible

In this Eqonomics, we will showcase a simple and popular product linked to the price of BTC: The Reverse Convertible.

A structured product is a pre-packaged investment with a defined risk-return profile and is linked to an underlying asset’s performance. Unlike buying a stock, bond, or individual crypto, structured products have a fixed maturity, and they may also include an early conditional redemption.

Structured products can provide exposure to crypto in a more accessible format, such as a fund or a note bought and settled in USD. Investors can obtain exposure to Bitcoin performance without having to own or store any.

What is a reverse convertible?

Designed for yield, a Reverse Convertible offers investors an attractive fixed coupon. Although capital is at risk, a Reverse Convertible provides limited mitigation to adverse BTC performance.

The redemption of capital at maturity is dependent on the BTC/USD price, and clients will suffer a loss if the price at maturity is below a pre-determined level.

Pricing example

Maturity: 30 September 2022

Coupon: 10% (20% p.a.)

Strike: $40,000 (80% of initial level)

BTC/USD Price: $50,000

Investors purchase the product for $100 at inception.

At maturity, there are two outcomes:

  • If BTC/USD is above $40,000 (80% of its initial price), investors will receive their entire initial investment of $100.
  • If BTC/USD is below $40,000 they will suffer a capital loss. For example, if BTC/USD is $30,000, investors would receive 75% of their initial capital. Redemption is calculated as $100 x $30,000 / $40,000 = $75.

In all cases, a coupon of $10 is paid.

Downside protection is provided for up to a -20% move in BTC/USD price at maturity.

Pricing is indicative only and not a solicitation of investment.

Determining the payout

The product’s risk/reward profile follows the logic of an investor selling a put option.

  • Put options are more expensive when implied volatility is higher. Higher volatility, higher coupon.
  • The strike is a key factor when pricing a reverse convertible. A strike closer to the current spot price leads to a higher probability of capital loss at maturity. Higher strike, higher coupon.
  • Options increase in price as a function of their expiry. Longer maturity, higher coupon.

As for all investments: the higher the perceived risk, the higher the potential reward.

Suitability for you?

Structured products are historically a favorite of private banking clients as they receive yield for a recognized risk.

The products are customizable to match an investor’s risk/reward tolerance and can provide single exposure to more complex trades. They can also be structured to act as a hedge or replace traditional cash/fixed-income investments.

If you are interested in learning more about structured products at EQONEX, please get in touch.


Related Articles

The Correlations in Crypto

The Correlations in Crypto

May 13, 2022

Adam Wise

As markets behave badly, we can observe how crypto correlations have developed. In this Eqonomics, we explore the timing and magnitude of the correlation between BTC & ETH.

Keep up with crypto through EQONEX!


This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Understanding the value and limitations of Automated Market Makers

Understanding the value and limitations of Automated Market Makers

May 9, 2022

Adam Wise

Volatile conditions negatively impact the bid/ask spread and willingness of liquidity providers to offer depth of market.

All You Need to Know About Futures Combinations

All You Need to Know About Futures Combinations

April 29, 2022

Adam Wise

Following the launch of our latest BTC dated future contract, in this week's Eqonomics we provide a quick overview of our range.

Decentralized Collateralized Stablecoins

Decentralized Collateralized Stablecoins

April 22, 2022

Adam Wise

Today, we take an example of how a collateral-backed stablecoin in DeFi can be issued by anyone and how the peg is maintained. We start with how they are issued, including context from traditional finance.

THE EQONEX CRYPTO GUIDE AND LEARN HUB

Bringing digital assets to the world.

EQONEX is a digital assets financial services company focused on delivering a full, digital asset ecosystem that offers innovative, trusted, and transparent products and services.

Keep up with crypto through EQONEX!


This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

© 2022 EQONEX Capital Pte Ltd
All rights reserved.

IS 749075