Brazilian equity reverse convertible coupons soar

Annualised coupons offered on three-month reverse convertibles linked to Brazilian blue-chip stocks have soared over the past few months because of the extreme equity volatility environment. A reverse convertible priced in January last year on Vale do Rio Doce issued at 99% had a barrier of 80% and provided an annualised coupon of 13.89% or a flat-rate of 3.55%. The same product priced on November 12 issued at 99% with the same barrier yields an annualised coupon of 71.2%, which is a flat-rate of 17.8%.

"Reverse convertibles are paying huge coupons at the moment because of the increase in volatility, and this is likely to continue over the next few months," says Ricardo Kaufmann, head of full service brokerage at Bulltick Capital markets in Miami. Daily volatility recorded by the Vix index spiked at 80.06 on October 24, reflecting a market estimate of future one-month volatility on the S&P 500 index, based on the weighted average of the implied volatilities, and is 61.47 as of 3.15pm in London