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I'm new in structured products and I need some help for understanding some stuff on autocall. When a client gives his money to the bank for investing in an Autocall, this money goes in a ZCB and in options.

  • First on ZCB: I know the bank issues the ZCB. So they invest the client's money on buying their own ZCB? That means it is the bank which provides the "interests" on the bond? So what is the point for the bank in issuing the ZCB if they have to pay interests on it each time they sell a product? I mean I just don't get the whole stuff around the ZCB. Where the money goes, who pays "interests" on this bond? Why not just investing the bond part in a random ZCB instead of issuing a new one?

  • On the options part of the product: I don't get how the bank how the bank cannot loose money. So the investor sells the PDI, and buys autocallable digitals, right? But in case the investor receives all the coupons that the product could give, the money received by the bank for PDI is not enough to pay all the coupons, right? So where does the money come from to pay all the coupons?

  • If the bank is long on the PDI, its goal is that the client looses all his investment in PDI so the bank can earn money on it, no?

  • On the digitals within the product. Where does the autocallable feature come from? Is it a feature of the digitals? So these are autocallable digitals with 1 autocall barrier and 1 coupon barrier?

Sorry those are basic questions but I really don't understand the whole mecanism. Thank you.

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  • $\begingroup$ A structured product is one product that the investor buys. It's like going on vacation where then same agent sells the flight, transfer to the hotel and accommodation in one package. From a banks perspective, you don't try to replicate every single AC you sell. You also don't want or need the client to lose. It's really just a set of uncertain cashflows you discount. That's the cost of the AC. As a bank, You need to hedge your entire book and monitor your overall exposure. $\endgroup$
    – user70573
    Mar 12 at 1:51

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