how an ascot works
convertible bond traders are exposed to two types of risk one is the credit risk inherent in the bond portion of the investment the other is the market volatility on the share price of the underlying as it impacts whether or not the conversion option has any value for our purposes let s assume the convertible bond trader wants to focus on the equity angle of their convertible bond portfolio to do this the trader sells the convertible bond to an investment bank which will be the intermediary in the transaction the investment bank structures the ascot by writing a call option on the convertible portion of the bond and selling it back to the convertible bond trader the bond portion of the convertible bond with its payments is then sold to a different party who is prepared to take on the credit risk in return for the fixed returns the bond component may be broken down into smaller denomination bonds and sold to multiple investors acots and convertible arbitrage