Autocallable

An autocallable is a bank-issued note that pays an unusually high coupon — say 8% a year — as long as a stock or index doesn't fall too far. On scheduled observation dates (often yearly), if the underlying is at or above its starting level, the note "autocalls": you get your money back plus the coupon, and it's over.

The catch lives at the bottom: there is a barrier, typically 60–70% of the starting level. If the note survives to maturity and the underlying has fallen below the barrier, your capital takes the full loss of the underlying — down 45% means you get 55 back.

So the deal is: in flat, rising or mildly falling markets you collect handsome coupons; in a severe fall you own the crash. You are, without the paperwork saying so, selling crash insurance to the bank.

Typical structure (Phoenix)

• Underlying: an index, a single stock, or — for higher coupons — the worst performer of several ("worst-of").
• Autocall trigger: 100% of initial level, checked periodically. Some step down over time, raising call probability.
• Coupon barrier: e.g. 70% — coupons paid (often with memory) if the underlying is above it on observation dates.
• Capital barrier: e.g. 60% at maturity (European barrier) — below it, redemption = underlying performance.

Where the yield comes from

The investor is short a down-and-in put and receives its premium as coupon, plus (in worst-of notes) a premium for selling correlation — the risk that any one of several names crashes. Higher volatility, lower correlation, more names, lower barriers → bigger coupons.

Lifecycle reality

Most autocalls call early — often at the first observation — which is why issuance is continuous: redeemed money rolls into new notes. The pain scenario is a market that grinds below the trigger but above the barrier for years (no coupons, no call, capital locked), or a crash through the barrier near maturity.

Pricing: no closed form, simulate

The autocall's value is the risk-neutral expectation of its path-dependent cash flows — call events, coupons, barrier breach — discounted on the funding curve:

evaluated by Monte Carlo under a model calibrated to the whole volatility surface — local vol as baseline, local-stochastic vol (LSV) where forward-skew matters (it does: the down-and-in put is a forward-skew instrument). Worst-of notes additionally require a correlation model across underlyings.

The issuer's hedge book

Selling autocalls leaves dealers structurally long forward skew, long dividends, short vega convexity, with Greeks that flip sign as spot approaches triggers and barriers. Near a barrier, gamma and vega change violently ("barrier risk"), and hedging flows from the street's aggregate autocall book measurably move underlying markets (the famous feedback in Korean/European indices and, more recently, US single names).

Sensitivities that matter

• Skew: steeper skew raises the value of the embedded put → richer coupons.
• Dividends: issuers are long future dividends; hedged via dividend futures.
• Correlation (worst-of): dealers are short it; correlation spikes in crashes exactly when barriers approach — wrong-way everything.

The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.