Modeling autocallable structured products

Abstract

Since first introduced in 2003, the number of autocallable structured products in the United States has increased exponentially. The autocall feature causes the product to be redeemed if the reference asset's value rises above a pre-specified call price. Because an autocallable structured product matures immediately if it is called, the autocall feature reduces the product's duration and expected maturity. In this article, we present a flexible Partial Differential Equation framework to model autocallable structured products. Our framework allows for products with either discrete or continuous call dates. We value the autocallable structured products with discrete call dates using the finite difference method, and the products with continuous call dates using a closed-form solution. In addition, we estimate the probabilities of an autocallable structured product being called on each call date. We demonstrate our models by valuing a popular autocallable product and quantify the cost to the investor of adding this feature to a structured product.

Valuation of Structured Products

“…In this paper we have reviewed and demonstrated four approaches that can be used to estimate the fair value of a wide variety of structured products, highlighting the benefits and limitations of each approach. This work is based on and complements our daily valuation of over 20,000 US structured products described in Deng et al (2014b), as well as our product-specific valuation experience in Deng et al (2012), Deng et al (2011b), , Deng et al (2010), and .…”

A risk analysis of step-down equity-linked securities based on regime-switching copula

“…The author presented a formula that can estimate the probability of early redemption and expected return of auto-callable structured products. Deng et al (2011) derived a partial differential equation to model auto-callable structured products. The authors illustrated the pricing of a popular auto-callable product and estimated the probability of early redemption at each auto-call date.…”

Super-Fast Computation for the Three-Asset Equity-Linked Securities Using the Finite Difference Method

“…The structure of the products has become complex as the number of underlying assets of the ELS increase. Three-asset step-down ELS is an option that is automatically exercised depending on the condition of each product, that is, a kind of autocallable structured product [1]. Whether the option is exercised or not is determined at an early redemption date that is before or at maturity.…”