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I'm pretty new in structured products area and I have some basics questions regarding autocall :

  • Why the autocall has an automatic redemption feature ? I mean an Investor could be interested in earnings coupons during more time if they are attractive. What is the purpose of this calling mechanism ? same question for the bank ?
  • Why the calling mechanism should be linked to the underlying level ? How the callable level is calibrated ?
  • Could we really consider that the bank is short digital to materialize the calling feature ? Because if the bank is short, that means that it takes the risk to pay 1 * coupon in case the product redeem whereas it has already the coupon in its book (coming from the investment of the D&I option) as a hedge (no risk there)

Sorry if these questions are obvious

Thanks, Emilio

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  • $\begingroup$ The buyer wants to collect big coupons, the seller wants protection against the price of a commodity going down. If the price of the commodity goes up a lot, usually the seller does not need protection any more, or if they do they want to negotiate a new deal with a new protection level (and new price) and get out of the old deal. Hence the automatic redemption. $\endgroup$
    – nbbo2
    Mar 31, 2022 at 18:49

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