An Ascot gives the equity/volatility buyer a way to sell the bond floor while retaining a callable claim on the convertible. That makes it a powerful credit hedge when a plain asset swap or CDS overlay is not the right package. It is also an American option on a convertible with a floating strike, so copying the underlying convertible's greeks is wrong. This note explains the economics, provides a pricing sketch, and isolates the delta, vega, and rho that a desk must risk.
Learning objectives. By the end of this note you should be able to:
- map the credit seller, intermediary, and credit buyer into a callable asset-swap package;
- state the Ascot exercise payoff and explain why its strike floats;
- contrast intrinsic valuation with an option model on a convertible lattice;
- explain why Ascot rho differs materially from convertible rho and why delta is not zero below the recall price.
In this lesson
- The callable asset-swap package
- Floating strike and exercise value
- Economics for the two buyers
- Pricing: intrinsic value versus an option model
- Ascot greeks
- Risk management without full term-sheet engineering
Before you start
The full lesson, with worked examples and exercise solutions, is for members.
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