A callable structured product is a note that is callable by the issuer. The note is linked to an underlying asset, or 'reference asset.' If the reference asset reaches the call price during the term of the note, the note is called and note holder receives a pre-specified return. If the reference asset never reaches the call price during the term of the note, the note is never called and the note holder simple receives the face value of the note at maturity. This face value reflects the value of the reference asset - if the reference asset depreciates, so does the face value of the note. A callable structured product is economically equivalent to i) owning a stock and selling a call on the stock and ii) owning a reverse convertible. Callable structured product is branded as autocallable structured product, the primary difference being that the autocallable structured product has typically longer maturity.
In this paper, we present a Partial Differential Equation (PDE) framework used to value callable structured products. We then use this framework to value some callable structured products and compare them with a benchmark, an identical structure product without the call feature.
We conclude that the callable structured product is worth less than their benchmark and that the call feature on a plain-vanilla structured product generates incremental costs to investors.
