Which preferred shares can be exchanged for common shares, with the exchange ratio set prior to issuance?

Convertible preferred shares are designed specifically to be exchanged for common shares, which is a key feature of this type of security. The exchange ratio is predetermined at the time of issuance, allowing investors to convert their preferred shares into a specified number of common shares based on this ratio. This feature provides the potential for capital appreciation since, under favorable market conditions, the value of common shares can increase significantly.

Participating preferred shares, while they may provide additional benefits by allowing shareholders to participate in excess earnings beyond the fixed dividend, do not inherently include the provision to convert to common shares. Cumulative preferred shares ensure that any missed dividend payments are accrued and paid in the future, but again, they do not include conversion rights. Callable preferred shares give the issuer the right to repurchase the shares at a specific price after a predetermined date, which also does not involve conversion into common shares.

Therefore, the unique characteristic of convertible preferred shares that allows for pre-established terms to convert into common equity makes them the correct answer to the question.