In reverse convertible investment, the term “barrier” denotes a threshold which, when surpassed by a rate, triggers an action.
Barriers are used in many financial instruments. In the case of barrier options, a rate falling above or below a barrier (depending on the option type) gives the option holder the right to exercise the option. The crossing of a barrier triggers the conversion of a reverse convertible security.
A barrier may be negative (below a given price or rate) or positive (above a given price or rate). Depending on the investment instrument in question, a rat may have to exceed, fall below, not exceed or not fall below a barrier.
As long as the performance of an investment instrument’s underlying assets does not exceeds the barrier, the instrument retains its original form. If the performance of the underlying assets falls below the barrier, the instrument is converted and the issuer (borrower) can choose to pay out the underlying assets instead of repaying the principal in cash.