Autocallable Structured Products

Abstract

In a world of persistently low interest rates, investors look for ways to increase yield without bearing the full volatility and risk of principal loss of the equities market. A great variety of structured products exist, many tied to stocks, with various features to modify risk exposure or lower cost. Risk may be reduced by incorporating specified coupon rates and principal guarantees, whereas cost can be lowered—and yield increased—by making the payoff path-dependent or the coupon payment contingent on some other factor or the principal protection less than 100%. These features, in turn, may be moderated by cumulating skipped coupons and paying them all when a scheduled payment is actually made, by mitigating incomplete downside protection by conversion into the underlying stock when the principal value falls too far, by adding some equity participation on the upside, or by incorporating “best-of” or “worst-of” contingencies into the payoff. Remarkably, Guillaume provides a general analytical valuation model that can price an “auto callable structured product” with all of these features.

TOPICS: Derivatives, fixed income and structured finance