Fairmat Example

An autocallable bond is a structured product which offers the opportunity for an early redemption if a predefined event occurs and pays coupons conditioned to the realization of other events.  Both these opportunities are linked to a function of the performance of the underlying which may be composed by several stocks.

The peculiar characteristic of the autocallable bond is the presence of an early redemption clause (hereinafter called Early Redemption Event or ERE) which, however, is not controlled by the issuer (the so-called callability), but rather,  is automatically carried when the performance at certain time t exceeds a certain threshold (hereinafter called High Trigger Level or HTL).

The attached case study below shows how to model and price most of the autocallable contracts found in the market.

Attachments

Autocallable bond case study Autocallable bond fairmat model