Structured Products

An autocallable, which is the abbreviation of "automatically callable", is a feature of an exotic option. This feature is often found in structured products with longer maturities. A product with an autocallable feature would be called prior to maturity by the issuer if the reference asset is at or above its initial level (or any other predetermined level) on a specified observation date. The investor would receive the principal amount of their investment plus a pre-determined premium (often paid out in the form of a coupon) and the autocallable product is said to be redeemed early.

Autocallable products may be linked to common stocks, baskets of stocks, stock market indices, commodities or other asset classes. They may be included in all kind of product types. The most frequent payoffs linked with an autocallable feature are capital guaranteed notes and barrier reverse convertibles. For instance, the Express Certificate is a product including an autocallable feature.

Example: Autocallable Note

An Autocallable Note belongs to the category of capital guaranteed products. The primary feature of an Autocallable Note is its potential for enhanced yield. Autocallable Notes are designed to pay a coupon that may be higher than the coupon an investor would otherwise receive on a fixed income security with a comparable maturity. However, the reference asset must close at or above a pre-determined level on the relevant specified observation date in order for the Autocallable Note to pay a coupon. Unlike a direct investment in the reference asset, the appreciation potential in Autocallable Notes is limited to the coupon amount. The investor will not participate in the gains of the reference asset, if any. Some Autocallable Notes have a Memory function embedded. With a Memory feature, the product will pay any coupons that have not been paid on previous observation dates, if on a subsequent observation date all prerequisites are met.

Example and payoff

The payoff of a product that includes an autocallable feature is shown to the right. It can also be shown as a flow diagram, as the scenarios are path dependent according to time (if, then.... if not, then else...) This hypothetical example shows the payoff scenarios with an autocallable capital guaranteed note that includes a Coupon Memory function:

• Product type: fully capital guarenteed note
• Reference Asset: ABC Index
• Tenor: 4 years, Autocallable annually
• Annual Coupon: 5.00%, with Memory Function
• Initial Index Level: 100% (at-the-money spot)
• Coupon Level: 95% of the initial index level observed on each observation date
• Observation dates: on each anniversary date of the product
• Memory function: if at an observation date, including the redemption date, the ABC index closes at or above a Coupon Level, all previously left out coupons are paid out on this observation date
• Capital Guarantee Level: 100% of the initial index level

Hypothetical possibilities of payout prior to maturity:

• If the index closes below the coupon level on an observation date, the investor would not receive any coupon payment, or
• If the index closes at or above its Coupon Level on an observation date, the investor would receive the principal amount of their investment plus the annual coupon plus all previous left out coupons and the Autocallable Note would be called.

Hypothetical possibilities of payout at maturity:

• If the index closes above the Coupon Level on the final valuation date, the investor would receive the principal amount of their investment plus the annual coupon plus all previously left out coupons, or
• If the index closes below the Coupon Level on the final valuation date, the investor would receive the principal amount of their investment, but would not receive any coupon payment.

Impact Factors

Many economic and market factors will impact the value of the notes, of which the level of the reference asset on any day is usually the most importent. However, the value of the notes will be affected by an additional number of economic and market factors that may either offset or magnify each other, including:

• the expected volatility of the reference asset or its underlying components;
• the time to maturity of the notes;
• interest and yield rates in the market generally;
• the creditworthiness of the issuer, including actual or anticipated downgrades in the credit ratings of the issuer.

Variants

Coupon Level decreases at each observation date (e.g. t₁=100%, t₂=95%, t₃=90%, t₄=85%): lower coupon but increased chance to get the sum of the coupons as the product draws near maturity.

The autocallable feature is often used in combinations with conditionally (sometimes called "contingent") capital protected products. In these cases, a barrier serves as a protection against medium market corrections. The coupons are usually far greater than with fully capital guaranteed notes. Besides the mentioned Express Certificates, a similar example is the Callable Yield Note, in which the issuer chan choose to redeem the product at its discretion. These products are better suited for investors being able to sustain capital losses, though, as their risk profile is rather comparable to a stock investment, even with barriers as low as 50%. In the last ten years, these products would have broken their barriers as often as not. The Book "How to Invest in Structured Products" includes 11 pages dedicated to the autocallable and the callable features in structured products.