Let's say that I'm issuing an Autocallable Note with the following features:

Underlying: FTSE 100

Autocall Observation Frequency: Annual Observation

Autocall Level: 100% of Initial Level of FTSE 100 (The Note autocalls if FTSE 100 goes above Autocall Level at Observation Dates)

Annual Coupon: 10% (Coupon only pays out when the Note is autocalled. Coupon accumulates to next year if the note is not autocalled)

Maturity: 6 years

Knock-In Barrier: 60% of Initial Level of FTSE 100 (KI only observed at maturity. If the Note is neither Autocalled nor Knocked-In at maturity, investor get 100% money back)

With the above Autocall Note, is the Issuer long or short vega? Please explain.

Is the issuer long or short interest rates? Or is it more complicated when it comes to interest rate risks of an Autocall Note?

Also, what other risks are there for the issuer?


Although, it will depend on current interest rate, if the issuer is paying "coupon" (which is strip of barrier options), the PV of those coupon (or the price of the barrier options) will have to be balanced out by something else. In above case, it will be PV of the interest earned on the notional of the note + option premium he pays for KI option.

So vega wise , issuer net vega will be sum of long vega due to KI put option and short vega due to strip of barrier options.

Interest rate wise, issuer is long interest rate as he has agreed to pay a fixed rate against the floating rate received on the note notional.


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