Autocallable Type 01

ORE characterises the autocallable option of type 01 by its data: a notional amount, a determination level, a trigger level, the reference underlying, a number of fixing dates with matching settlement dates, a list of accumulation factors, and a cap. On each fixing date, when the underlying spot is at or below the trigger level, the option holder receives the notional times the accumulation factor for that fixing. The payment falls on the settlement date of that fixing, and the structure terminates on this same date.

Without a trigger event on any fixing date, a second branch applies. When the underlying spot is above the determination level on the last fixing date, the option holder pays an amount to the counterparty. The catalogue scopes the underlyings as follows:

The underlying can be an Equity, FX or Commodity underlying.

Source: ORE User Guide, Products catalogue, autocallable_01.tex.

An autocallable is a savings-style option on one market. On each checking date the market decides the next instalment. When the market is at or below the trigger, the holder receives an instalment and the product ends. The instalment grows with the fixing dates. When the market never falls to the trigger, the holder owes a final capped payment at the end, linked to how far the market sits above the determination level. The buyer of the structure is short the far upside and long the trigger path.

The catalogue shows the trade data container Autocallable01Data for the Autocallable_01 trade type. NotionalAmount is the notional amount of the option. DeterminationLevel is the level above which the final payment branch fires. For an FX underlying it is the number of units of CCY2 per unit of CCY1; for an equity underlying it is the equity price in the equity currency. TriggerLevel carries the same meaning per underlying type, as the level that triggers the early redemption. Underlying names the option underlying. Position takes Long or Short. PayCcy is the pay currency of the option.

FixingDates is the fixing date schedule, given as a ScheduleData subnode. SettlementDates is the settlement date schedule in the same form. AccumulationFactors is a list of values, one per fixing date. Cap is the maximum amount, per unit of notional, payable by the option holder when no trigger event ever occurred. ORE describes its role as follows:

The maximum amount, per unit of notional, payable by the option holder if a trigger event never occurred

Source: ORE User Guide, Products catalogue, autocallable_01.tex.

The cap applies when the underlying value is greater than the determination level at the last fixing date.

ORE states the two payout branches of the product. On the i-th fixing date, when a trigger event occurs, the option holder receives:

Payout = NotionalAmount x AccumulationFactor(i).

The structure terminates on the settlement date of that fixing. When a trigger event never occurs and the underlying spot at the last fixing date is above the determination level, the option holder pays:

Payout = min(Cap, Underlying(fn) - DeterminationLevel).

The payment is capped per unit of notional: the cap multiplies the notional of the trade.

• The underlying spot. It decides the trigger branch on each fixing date and the final payment.
• The volatility of the underlying. It drives the probability of a trigger event.
• The trigger level and the determination level.
• The accumulation factors, which set the instalment sizes.
• The cap, which bounds the final payment.
• The interest rates that discount the instalments and the final payment.

The fixing dates are the heartbeat of the product. Each fixing date checks the spot against the trigger level. A trigger event pays the accumulated amount on the matching settlement date and terminates the structure. Without a trigger, the structure runs to the last fixing date, where the final payment branch is decided against the determination level. The two schedules of dates and the accumulation factors shape how the value decays as the structure survives.

An autocallable pays a coupon-like stream while the market stays quiet, and redeems early on a down move. Investors use it when they expect the underlying to hold above a level, collecting instalments along the way. The final capped payment is the price of that income. In ORE Studio a customer books autocallables of type 01 to value them and run sensitivities on the ORE engine.

ORE's catalogue shows a long autocallable on EUR-NOK with a notional of 12000000 EUR, a determination level of 11.0 and a trigger level of 9.8. The accumulation factors grow from 0.344 to 1.544 across the five annual fixings:

<Autocallable01Data>
  <NotionalAmount>12000000</NotionalAmount>
  <DeterminationLevel>11.0</DeterminationLevel>
  <TriggerLevel>9.8</TriggerLevel>
  <Underlying>
    <Type>FX</Type>
    <Name>ECB-EUR-NOK</Name>
  </Underlying>
  <Position>Long</Position>
  <PayCcy>EUR</PayCcy>
  <FixingDates>
    <ScheduleData>
      <Dates>
        <Dates>
          <Date>2018-09-27</Date>
          <Date>2019-09-27</Date>
          <Date>2020-09-27</Date>
          <Date>2021-09-29</Date>
          <Date>2022-09-28</Date>
        </Dates>
      </Dates>
    </ScheduleData>
  </FixingDates>
  <SettlementDates>
    <ScheduleData>
      <Dates>
        <Dates>
          <Date>2018-10-07</Date>
          <Date>2019-10-09</Date>
          <Date>2020-10-07</Date>
          <Date>2021-10-07</Date>
          <Date>2022-10-07</Date>
        </Dates>
      </Dates>
    </ScheduleData>
  </SettlementDates>
  <AccumulationFactors>
    <Factor>0.344</Factor>
    <Factor>0.733</Factor>
    <Factor>0.911</Factor>
    <Factor>1.123</Factor>
    <Factor>1.544</Factor>
  </AccumulationFactors>
  <Cap>1.0</Cap>
</Autocallable01Data>

Source: ORE User Guide, Products catalogue, autocallable_01.tex, listing Autocallable Type 01 data. The settlement dates follow their fixing dates by a few days.