Risk Latte - Reverse Convertibles and GOALs

Reverse Convertibles and GOALs

Rahul Bhattacharya
Aug 20, 2006

Like many of the famous and infamous (and some of course, brilliant) exotic derivative structures of the early Nineties Reverse Convertibles were perhaps engineered by Bankers' Trust as well. The year the product was introduced was 1993 and the investors, mostly the large institutional investors, were probably looking for both a larger than market coupon payment as well as to increase their exposure to some large cap stocks in the U.S. markets at a price around 10% below the current level at that time.

Reverse convertibles have embedded put option in them (conventionally a 90% strike) and essentially entails that the investor sells an out of the money put to the issuer in return for a high coupon payment. Generally these structures are of short term maturity (between 6 months to 2 years maximum). In Europe the popularity of the reverse convertibles were facilitated by a low yield and high equity volatility environment in the late nineties. Warburg Dillon Read (then a European investment bank) introduced this structure as Geld oder Aktien Lieferung (GOAL) which means cash or share delivery in German.

Reverse Convertibles are really attractive to large investors who are willing to take deliver of the shares (if the put option is exercised by the issuer) at a lower price to build up their portfolios and in the process enjoying a high coupon. This product is not at all suitable for retail investors who may be motivated only by a high coupon on the structure but may not be in a position or do not want to take delivery of shares at a lower than original price.

Reference: The above is referenced from Structured Products Vol 2 by Satyajit Das (3 rd Edition, John Wiley & Sons).

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