| AFRICA & MAURITIUSStructured Products And Derivatives Association |
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| AFRICA & MAURITIUSStructured Products And Derivatives Association |
Autocallables, also known as auto-trigger structures or kick-out plans, are very popular in the world of structured products. Product providers use them to offer higher payoffs than those on structured products that automatically run to a full term. In its standard form, an auto callable is a note that is linked to an underlying risky asset and that has no fixed maturity. What is referred to as the maturity of the autocallable is actually the maximum duration this product can stay alive, usually ranging from 2 to 5 years.
Several observation dates within the product’s life are prespecified in the contract, typically on an annual or semi-annual basis. At each observation date, if the value of the underlying is at or above a prespecified level, usually called the autocall trigger level or autocall barrier, then the principal amount is paid back by the issuer to the holder of the note, along with a coupon rate.
A lot of plans kick out in year one or two, leaving investors with the choice to reinvest in rollover substitutes from the same provider, switch to another offer or opt back into the markets. Another level can be prespecified for each observation date, below the autocall trigger level, such that if the note does not autocall but the underlying is above that lower level, usually called the coupon barrier, then the note pays a coupon rate.
Some autocallable notes have a memory function embedded – also called a snowball effect. With a memory function, the product will pay any coupons that have not been paid on previous observation dates, if on a subsequent observation date all prerequisites are me.
Highly recommended when one expects a minimum level of stability however is not sure about where the market is going and whether to expect a mild increase or decrease. The structure is such that it caters for many possible scenario; an early call every year if the underlying increase above 100 % and a coupon payment each year with memory effect if the underlying is above the Coupon Barrier. Ideal in a trading range or unidirectional market environment following a strong movement of financial markets (the higher the volatility at the time of the launch, the higher the coupon of the product).
