How Equity–Funding Correlation Affects Autocall Exposure

Summary

The note explains the issuer’s equity and funding exposure in an up-and-out autocall, framed through changes in the product’s expected duration. It assumes the buyer is short a put at maturity and defines funding as the market equity-funding component of the forward price.

When the stock falls, the note is less likely to be called, so its expected duration grows. The issuer’s position then becomes more short the forward at maturity, leaving it longer dividends and shorter funding. On that reasoning, the issuer gains when equities and funding fall together, and loses when they rise together, which motivates describing the issuer as long equity–funding correlation. This is a qualitative explanation; it gives no valuation formula or numerical example, and its conclusions depend on the stated payoff and funding interpretation.

Key ideas

• A decline in the stock can extend an autocall’s expected duration by making an early call less likely.
• As duration extends, the issuer’s forward exposure at maturity becomes more short.
• The issuer is described as long dividends and short funding in this explanation.
• The correlation intuition depends on the specified autocall payoff and funding definition.

Tags

# Autocall- equity/funding correlation


# Autocall- equity/funding correlation












Could someone explain how the price of an autocall changes with equity/funding correlation, please? I have sometimes heard that the trader who sells an autocall is long equity/funding correlation but I don't understand why.

Thanks in advance

## Answer by ellie_cat (score 1)

https://quant.stackexchange.com/a/63786

Just think of it in terms of the changing duration of the autocall note. Let's use the example of an up-and-out autocall where the buyer is short a put at maturity.

Also, I interpret "funding" as market equity funding $f$, i.e. $\text{Fwd}(t,T)= S e^{(r-q+f)(T-t)}$.

If the stock price decreases, then the autocall note duration increases (less likely to be called). The issuer therefore becomes more short the forward at maturity. This means the issuer is longer dividends and shorter funding. The issuer makes a mark-to-market gain if both equities and funding decline together, and vice versa.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.