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CAIE - Coggle Diagram

- - - - They are called away at par when the underlying index performs well enough because that’s the core economic trade of an autocallable: you receive high, contingent coupons and conditional downside protection, and in return you give up long‑term upside and accept the risk that successful notes will terminate early.
      - Exhibit negative convexity: when things are going well and prices rise, the upside is capped because the notes are called away at par
        
        combination – capped upside via early calls + conditional sharp downside via barriers
        
        In big up markets, CAIE will tend to lag pure equity because many underlying notes get called and reset, truncating that upside
        
        In severe down markets, if the reference index spends enough time below barriers near maturity, principal loss can kick in rapidly – the payoff “bends down” versus what investors might expect from a simple high‑yielding bond substitute.
        
        negative convexity (same idea as a callable bond or MBS: you get called away when things are good, and you hurt more when things are very bad)
- - - - if it's above the maturity barrier THEN principal is protected at par
      - If it's below the maturity barrier THEN the investor takes a principal loss in line with where it finishes
    - - Key risk: Left tail equity risk (once in a generation event), a dramatic market drawdown and a recovery that takes quarters or years
      - Don't want this situation where it can potentially go below the coupon barrier (then no coupon) and the maturity barrier at final observation