Published in the Journal of Derivatives & Hedge Funds 17, 326-340 (November 2011).

Since first introduced in 2003, the number of autocallable structured products in the U.S. has increased exponentially. The autocall feature immediately converts the product if the reference asset’s value rises above a pre-specified call price. Because an autocallable structured product matures immediately if it is called, the autocall feature reduces the product’s duration and expected maturity.

In this paper, we present a flexible Partial Differential Equation (PDE) framework to model autocallable structured products. Our framework allows for products with either discrete or continuous autocall dates. We value the autocallable structured products with discrete autocall dates using the finite difference method, and the products with continuous autocall dates using a closed-form solution. In addition, we estimate the probabilities of an autocallable structured-product being called on each call date. We demonstrate our models by valuing a popular autocallable product and quantify the cost to the investor of adding this feature to a structured product.

Dr. O’Neal describes the various mutual fund share classes and explains how differences in commissions to brokers and costs to investors across share classes can create conflicts of interests.

During the second half of 2008, Oppenheimer’s Champion Income Fund lost 80% of its value – more than any other mutual fund in Morningstar’s high-yield bond fund category. These extraordinary losses were due to the Fund’s investments in credit default swaps (CDS) and total return swaps (TRS). The Fund used CDS and TRS to leverage up the Fund’s exposure to corporate debt and asset-backed securities, including Mortgage-Backed Securities and swap contracts linked to Residential and Commercial Mortgage-Backed Securities indices.