Accelerating AutocallsMarch 20, 2017 - 15:45
Autocall remains the most popular type of structured product for most
investors. The annual accrual offers the prospect of high returns even when
markets are flat, or in the case of defensive structures when markets are
lower. The accelerating Autocall is a variation on this theme that has been
developed for investors that think that the return from equity markets will be
lower than average. The Accelerating Autocall offers the prospects of even
better returns than a conventional product if the realised duration increases
at the cost of a slightly lower return if the product redeems at the first opportunity.
Accelerating Autocall that the payoff increases at an accelerating rate. So
rather than the pay-off increasing by a flat XX% for each period, the incremental payoff from one period to
another is calculated as (AA% + N x BB%), where N is the number of periods to
the redemption date. AA% is a constant and BB% is the increase from one period
to the next.
illustrate the difference, we have priced up two products with Natixis on the
RATIONAL AND ANALYSIS
Accelerating Autocall will be more attractive for investors that think that
there is a good chance that the realised duration will be longer than normal. This
is where the product offers a superior return.
will suit investors that agree with the following statements:
returns from the FTSE from here are likely to be lower than average
is a chance that the FTSE will be lower than the current level in a year’s time
is a negligible chance that the index will fall by more than 40% over 6-years
to accept a risk to capital / issuer default / invest for 6 years etc
below illustrates the chance of each event for the product with 100% triggers:
both the stress test and historic analysis the Accelerating Autocall offers a
better return with less risk.
back-test chart below illustrates how effective the accelerated Autocall has
been when markets have suffered a short term correction.
product sacrifices a small amount of return if the product redeems at the end
of the first year, and uses this value to offer the prospect of a much higher
return if the product redeems later.
quantum of this exchange reflects the relative probability of each event in the
trade-off will be very attractive for investors that think that the level of
the FTSE is currently high.
pricing we have from Natixis is “indicative”. The accelerating Autocall looks
to have a higher value as well. Our Fair Value is calculated using the issuer
CDS and implied funding based on secondary market pricing. Based on these
values we would anticipate achieving better levels when we trade.
David has been involved in equity derivatives, equity structuring and the structured product market for over 25 years. Before setting up CUBE in 2013 David worked at J.P. Morgan, Barclays and RBS. David has worked with and for retail product providers, discretionary managers and institutional investors.