Hello,
This segment is designed to explain a note
with capital risk and which is callable. These
securities are also called "autocall" notes.
For example, we will take a note that is refundable
in advance (autocall) linked to the EuroStoxx50
index, with a maturity of 3 years. Here are
the features.
The underlying asset is the EuroStoxx50 index.
The coupon for year 1 is set at 8%, the coupon
for year 2 is 16% and the coupon of year 3
is 24%. The barrier at maturity is 70% of
the initial level of the index and the term
of this note is 3 years.
Here is how an autocall note works. At the
issue date, we measure the level of the index.
This will be our starting level. The starting
level here is set at 3800 and the barrier
of 70% of the starting level will be 2660.
Now let's go to the first valuation date,
which is the first anniversary of the note,
and we will measure the level of the EuroStoxx50
index. If it is equal to or greater than 3800,
the capital will be repaid to the investor,
as will the coupon for the year 1, which is
set at 8%.
If the index is below the level of 3800, we
go to the second valuation date, and check
again: Is the EuroStoxx50 index at or above
the level of 3800? If so, the principal will
be repaid to the investor as will a variable
return of 16%. It is important to mention
that when the note is redeemed by the issuer
and that the variable return is paid, the
note no longer holds any value.
If, at the second valuation date, the index
level is below 3800, we would go to the third
valuation date and check the level of the
index again. If the final level of the index
is at or above 3800, the principal is repaid
as is a variable return of 24%, which was
the coupon rate for the third year. If the
index level is lower than 3800, but not less
than 70% of the barrier of 2660, then the
investor gets back their investment. If the
final index level is below 2660 at the time
they will receive the performance of the index.
So if the index had lost 40%, for example,
they would receive $60 for each $100 they
had invested.
We hope that you found this segment useful.
We invite you to view our other segments on deposit notes.
