SRPInsight EXPERT VIEW
Another UK distributor IDAD also currently has a product with the star feature available in the offshore market. It is issued by BNP Paribas and called the One Star Effect Reducing Autocall. This is linked to four stocks: Advanced Micro Devices, Carnival Corporation, Tesla, and Zoom Video Communications. This product pays an annual return of 23% if all four underlyings are above the required autocall levels at which point the product terminates. The first autocall point is after one year and the autocall level is 100% of the initial level. During the life of the product, the autocall level is reduced by 2.5% at each quarterly point down to 60% for the last five autocall dates.
historic market performance. The results demonstrate the effect of the star feature on the potential return of capital for the IDAD product. Introducing the star feature decreases the chance of capital loss from 31.08% to 21.71%.
The product has European barrier of 50% which will be breached if one of more of the underlying stocks are below this level at maturity. However, because of the star feature, if the barrier is breached and one of the remaining stocks is at or above 100% of its initial level, capital will be returned in full.
Both of these example products are defensive autocalls linked to baskets of stocks. At the time of the analysis of the IDAD product, the one year at-the-month volatilities for the stocks were typically over 35% and correlation levels between 70% and 85%. The product offers a high return of 23% p.a. and has a deep barrier of 50% with the additional protection of the star feature which will benefit investors in different scenarios such as increased volatility and one stock performing adequately even if one of the rest suffers a large fall.
The table shows a summary of output from the Structured Edge research report on the IDAD product compared with an autocall structure with the same schedule of payments and barrier level but no star feature. The simulated probabilities are calculated using FVC’s pricing models, independent market data and projected equity growth rates based on long term
The initial estimated price difference between the IDAD product and the control was in excess of 5%. This is a significant difference and shows that the feature comes at a cost which will reduce the potential returns of the product. An autocall without the star feature could have offered a coupon in excess of 28% for the same overall cost structure.
Disclaimer: the views, information or opinions expressed herein are those of FVC, and do not necessarily reflect the views of SRP.
The star feature is an enhancement to the standard European barrier www.structuredretailproducts.com
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