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Could someone explain how the price of an autocall changes with equity/funding correlation, please? I have sometimes heard that the trader who sells an autocall is long equity/funding correlation but I don't understand why.

Thanks in advance

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Just think of it in terms of the changing duration of the autocall note. Let's use the example of an up-and-out autocall where the buyer is short a put at maturity.

Also, I interpret "funding" as market equity funding f, i.e. Fwd ~= S*exp(r-q+f).

If the stock price decreases, then the autocall note duration increases (less likely to be called). The issuer therefore becomes more short the forward at maturity. This means the issuer is longer dividends and shorter funding. The issuer makes a mark-to-market gain if both equities and funding decline together, and vice versa.

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  • $\begingroup$ Thanks. What do you mean by 'the changing duration of the autocall note'? $\endgroup$
    – Ingrid
    May 8 at 6:49

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