Autocallable products (‘autocalls’) are structured products linked to an underlying asset, which can automatically mature (or ‘kick out’) prior to their scheduled maturity date if certain pre-determined market conditions have been met with regard to the underlying asset.
An autocall is an investment package which comprises several financial instruments; a zero coupon bond combined with call and put options referencing the underlying asset.
A zero coupon bond is bought at a discount to face value, with the face value (original capital) repaid at maturity of the product. Options provide the right (not the obligation) to buy (‘call’) or sell (‘put’) a set quantity of the underlying asset at a predefined price on a specified date in the future. Digital options provide a fixed payout if the value of the underlying asset is at or above a fixed trigger level on an agreed measurement date.
An early kick out will occur if the observed level of the underlying asset is at or above the fixed trigger level. Often this is the level observed at the close of business on the start date of the plan (the ‘Opening Level’), however this is not always the case. Subsequent observations are carried out on agreed dates at regular intervals, annually being most common.
Many autocall products incorporate a conditional capital protection feature so that, if a kick out has not occurred before the end date of the structure, capital will be returned in full provided the underlying asset has not fallen below a certain level (‘the barrier level’). This barrier level can be measured at any point during the term of the investment (an American barrier) or only at maturity (a European barrier). Only if the underlying asset has fallen below the protection level and the product has not already kicked out, will investors be exposed fully to the downside of the underlying asset.
Structures can be used to express a view on a number of underlying assets including equity indices, a basket of stocks, individual stocks, funds, ETFs, commodities and many more.
Both the capital and investment returns described above are dependent on the financial strength of the issuer and whether they are able to meet their obligations. This is known as counterparty risk. For more information on this please see our Counterparty Guide.
£10,000 is invested into a six year, annual kick out plan, paying 7% for every year the Plan is in force if the FTSE 100 Index is at or above its Opening Level on any annual Measurement Date. The Plan has a 50% European barrier.
The Opening Level of the FTSE 100 Index was 6,000
- No kick out in years 1, 2, or 3 – but the FTSE Index closes at 6,050, above its Opening Level on the fourth anniversary of the Plan. Client receives - £12,800 (a £2,800 growth payment and a full return of capital).
- No kick out event occurs occurs during term of plan and the Final Level of the FTSE 100 is 2,700, 55% lower than its Opening Level. Client receives - £4,500 (no growth payment, and capital is reduced by the same percentage as the Final Level is below the Opening Level).