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InvestHub.com's
Finance Dictionary and Glossary of Investment Terms

Reverse conversion  

Definition 1.

technique in which brokerage firms earn interest on the stocks they hold for their customers by selling the short and investing the proceeds in money market accounts. The short positions are hedged to protect against adverse market conditions.
 

Definition 2.

Method by which a brokerage earns interest on its customers' stock holdings by selling a similar position short and investing the proceeds, usually in short-term money market instruments. The short position is usually hedged in order to protect against risk. The most common way of carrying out a reverse conversion is to short the stock, buy a call option and write a put option. Whether the brokerage makes money on the position depends on the borrowing costs for the short position, and the call and put premiums.
 
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