Autocall

An autocall is a structured note that redeems early if its underlying is at or above a set level on one of its observation dates. The investor then receives the capital plus a coupon. If the note is never called, capital at maturity is protected only down to a barrier.

How it works

A typical autocall has annual or quarterly observation dates, an autocall trigger at 100% of the initial level and a capital protection barrier at 50% to 70%, often observed at maturity only. In the snowball version, each missed coupon accumulates and is paid on the call date. Economically, the investor holds a zero-coupon bond, receives digital coupons and is short a down-and-in put. That short put finances the coupon, so the investor is short volatility and exposed to the downside. The note is also a debt of the issuer, which adds credit risk.

Example

Hypothetical five-year note on an index, with an 8% annual snowball coupon, a 100% autocall trigger and a 60% barrier at maturity. In year 1, the index is at 95%: no call. In year 2, it is at 104%: the note is redeemed at 100 + 2 × 8 = 116 per 100. Without a call, if the index ends at 70%, the investor gets 100 back with no coupon. At 55%, the investor gets 55.

On the desk

The headline coupon reflects the risk sold: higher volatility, a barrier closer to the initial level or a worst-of basket all raise it. The issuing desk ends up long the down-and-in put, with large gamma near the barrier at maturity.