A Phoenix note is a variant of the autocall. It pays a coupon on each observation date when the underlying is above a coupon barrier, even if the note is not redeemed early. It keeps the autocall trigger and the capital barrier at maturity.
How it works
The Phoenix separates two levels. The coupon barrier, often set at 60% to 80% of the initial level, decides whether the period’s coupon is paid. The autocall trigger, usually 100%, decides early redemption. With the memory feature, a missed coupon is paid later if the underlying comes back above the coupon barrier on a subsequent date. At maturity, if the underlying is below the capital barrier, the investor takes the loss in full. The coupon is lower than on a snowball autocall with the same parameters, because coupons are more likely to be paid.
Example
Hypothetical two-year Phoenix with quarterly observations, a 2% quarterly coupon with memory, a 70% coupon barrier and a 100% autocall trigger. Quarter 1: underlying at 85%, coupon of 2. Quarter 2: at 65%, no coupon. Quarter 3: at 90%, coupon of 2 plus the missed 2, so 4. Quarter 4: at 102%, the note is called early at 100 + 2 = 102. In total the investor receives 8 in coupons plus 100 of capital.
On the desk
The coupon barrier creates a string of digital options. The issuer’s hedge carries large gamma around that level on each observation date, as well as around the capital barrier near maturity.
Educational definition. Worked examples are hypothetical. Not an offer or a recommendation.