What Is a Pay Policy Line? What Is Its Relevance

question 51

Essay

What is a pay policy line? What is its relevance?

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Definitions:

Protective Put

Purchase of an asset combined with a put option on that asset to guarantee proceeds at least equal to the put’s exercise price.

Underlying Asset

The financial asset upon which a derivative instrument, such as a futures or options contract, is based.

Convertible Bond

A bond with an option allowing the bondholder to exchange the bond for a specified number of shares of common stock in the firm. The conversion ratio specifies the number of shares. The conversion price is the current value of the shares for which the bond may be exchanged. The conversion premium is the excess of the bond’s value over the conversion value.

Straight-Bond Value

The value of a bond calculated without considering any embedded options, based purely on its coupon payments and maturity value.