Ascot

ORE defines the product as follows:

An Ascot or a Convertible Bond Option is an American style option to buy back a convertible bond. The buyer of a Call Ascot can exercise the deal and get the underlying bond in exchange for paying the strike.

Source: ORE User Guide, Products catalogue, ascot.tex.

The call payout is the convertible price less the strike, floored at zero. The put payout is the strike less the convertible price, floored at zero. The strike itself is:

Strike = bondQuantity x (upfrontPayment + assetLeg - redemptionLeg) - fundingLeg

Source: ORE User Guide, Products catalogue, ascot.tex.

An Ascot protects a convertible bond holder. The holder can hand the bond back and receive a strike instead. The strike is fixed at trade inception from swap terms, not from the market. The structure turns a convertible bond into an asset swap with an embedded exit option.

An Ascot is set up using an AscotData block. The AscotData node has three sub-nodes. The ConvertibleBondData node describes the underlying convertible bond. Its BondData carries the SecurityId and BondNotional; the bond details are read from reference data in this case. The OptionData node carries the option terms. LongShort takes Long or Short and multiplies the option price by +1 or -1. OptionType takes Call or Put. The Style allows American exercise only. Settlement can be Cash or Physical. Exactly one ExerciseDate must be given. Premiums is optional. The ReferenceSwapData node holds a single LegData node that describes the funding leg of the reference swap. The asset leg is implied from the bond data. Payer should always be false, because the swap is entered from the viewpoint of the asset swap buyer.

The call pays max(0, convertiblePrice - Strike) at exercise. The put pays max(0, Strike - convertiblePrice). The strike bundles the conversion economics into a single number: the bond quantity scales an upfront payment plus an asset leg less a redemption leg, and the funding leg subtracts the cost of carry. The option can be exercised at any time until the exercise date because the style is American.

• The convertible bond price. It combines the equity value of the underlying shares with the credit of the issuer.
• The volatility of the underlying equity. It drives the conversion optionality.
• The strike structure: the upfront payment and the asset, redemption and funding legs.
• The interest rates that discount the funding leg.
• The credit spread of the issuer.

The option is in the money when the convertible price is on the right side of the strike. Every input to the convertible price moves the Ascot through it.

The holder can exercise at any time, so the profile follows the convertible bond. Early exercise pays off when the convertible price is high against the strike. As the bond ages, conversion value, time value and credit all decay toward the exercise date. After exercise the bond is delivered for the strike, or the difference is settled in cash.

An Ascot lets an investor hold a convertible bond with a known exit price. It is the option half of an asset swap on a convertible. A customer who owns the bond can buy the Ascot to cap the downside. In ORE Studio a customer books Ascots to value them and run sensitivities on the ORE engine.

ORE's catalogue shows a long American call Ascot on a convertible bond, funded by a floating reference swap leg:

<Trade id="Ascot">
  <TradeType>Ascot</TradeType>
  <Envelope>...</Envelope>
  <AscotData>
    <ConvertibleBondData>
      <BondData>
        <SecurityId>ISIN:XY1000000000</SecurityId>
        <BondNotional>1000000.00</BondNotional>
      </BondData>
    </ConvertibleBondData>
    <OptionData>
      <LongShort>Long</LongShort>
      <OptionType>Call</OptionType>
      <Style>American</Style>
      <Settlement>Physical</Settlement>
      <ExerciseDates>
        <ExerciseDate>2029-02-03</ExerciseDate>
      </ExerciseDates>
    </OptionData>
    <ReferenceSwapData>
      <LegData>
        <LegType>Floating</LegType>
        <Payer>false</Payer>
        ...
      </LegData>
    </ReferenceSwapData>
  </AscotData>
</Trade>

Source: ORE User Guide, Products catalogue, ascot.tex, listing Ascot set up using reference data. The source closes the AscotData element without the leading slash; it is normalised here.