Autocallable feature in 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 ba
rrier 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
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Autocallable feature in products

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
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Autocallable feature in products
- Observation dates: on each anniversary date of the product
- Memory function: if at an observation date, including the redemption date, the ABCindex
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

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Autocallable feature in products
Coupon Level decreases at each observation date (e.g. t
1
=100%, t
2
=95%, t
3
=90%, t
4
=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.
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