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Building an Autocall

Building an Autocall. Catley Lakeman Winter Offsite – January 2014. INTRODUCTION. “I believe each contract we own was mispriced at inception, sometimes dramatically so. I both initiated these positions and monitor them. If we lose money on our derivatives, it will be my fault.”

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Building an Autocall

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  1. Building an Autocall Catley Lakeman Winter Offsite – January 2014

  2. INTRODUCTION “I believe each contract we own was mispriced at inception, sometimes dramatically so. I both initiated these positions and monitor them. If we lose money on our derivatives, it will be my fault.” Warren Buffett – BH annual letter to investors, 2008

  3. Probabilities * Based upon CLS pricing models as at 30thDecember2013

  4. What can you buy? • Currently Possible: • FTSE / S&P 500 Defensive Autocall • 8.2% per annum potential return • Soft protection at 60%, observed at maturity only • Autocall barriers: • Year 1: 100% • Year 2: 95% • Year 3: 90% • Year 4: 85% • Year 5: 80% • Year 6: 75%

  5. In Pictures 149.2 Yr 6 141.0 Yr 5 132.8 Yr 4 124.6 Yr 3 116.4 Yr 2 108.2 Yr 1 100.0 Index 60% 75% 80% 85% 90% 95% 100% 59.99 0

  6. In Numbers

  7. In Building Blocks Building Block 1 = Strip of digital options ≈ Strip of call spreads Trader buys a lot of 1 year call spreads, fewer 2 year, etc 108.2 Index Yr 1 100.0 100% 8.2 0.0 91.8% Index 100%

  8. In Building Blocks Building Block 2 = Strip of zero coupon bonds Trader buys a lot of 1 year zcbs, fewer 2 year, etc Building Block 3 = Knock-In Put Trader sells puts at strike and barrier at different maturities 100.0 Index 60% 75% 59.99 0

  9. Summary • Probabilities are key, to all derivative pricing • Buy an autocall, you are short volatility • Small probability of calling in later years • When markets move the expected life changes!

  10. DISCLAIMER The information in this document is derived from sources believed to be reliable but which have not been independently verified. Catley Lakeman Securities makes no guarantee of its accuracy and completeness and is not responsible for errors of transmission of factual or analytical data, nor is it liable for damages arising out of any person’s reliance upon this information. All charts and graphs are from publicly available sources or proprietary data. The opinions in this document constitute the present judgment of Catley Lakeman Securities, which is subject to change without notice. This document is neither an offer to sell, purchase or subscribe for any investment nor a solicitation of such an offer. This document is intended for the use of institutional and professional customers and is not intended for the use of private customers. This document is not intended for distribution in the United States of America or to US persons. This document is intended to be distributed in its entirety. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. Catley Lakeman Securities is a LLP registered in England and Wales, Registered Office : One Eleven Edmund Street, Birmingham, B3 2HJ. Registration Number: OC336585, FSA Reference: 484826

  11. BUILDING BLOCKS 149.2 Yr 6 141.0 Yr 5 132.8 Yr 4 124.6 Yr 3 116.4 Yr 2 108.2 Yr 1 100.0 Index 60% 75% 80% 85% 90% 95% 100% 59.99

  12. BUILDING BLOCKS 149.2 Yr 6 141.0 Yr 5 132.8 Yr 4 124.6 Yr 3 116.4 Yr 2 108.2 Yr 1 100.0 Index 60% 75% 80% 85% 90% 95% 100% 59.99

  13. BUILDING BLOCKS 149.2 Yr 6 141.0 Yr 5 132.8 Yr 4 124.6 Yr 3 116.4 Yr 2 108.2 Yr 1 100.0 Index 60% 75% 80% 85% 90% 95% 100% 59.99

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