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Best-of put option analysis
F actshee t - F or Pr ofe ssi onal Inte r medi ar i es Onl y
Summary
This analysis aims to demonstrate the hedging effect of the best-of put option versus different market scenarios. It compares the MTM impact of a shift in the underlying
markets for a particular autocall payoff, versus the corresponding expected payoff for the best-of put option.
Description of best-of put option
Underlying performance %
The best-of put option pays the holder a put type payoff linked to the bestperforming underlying index out of a basket of underlying indices.
The best-performing underlying index is defined as being the least depreciated
index out of all the indices in the underlying basket.
The template best-of put that is used in this analysis has the below terms:
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1 year maturity
GBP denominated
90% strike
Best-of FTSE / S&P/ Eurostoxx 50
110
100
90
80
least depreciating
70
underlying
60
underlying
50
0
5
10
15
20
Time
Analysis assumptions
There are two factors that have been stressed in this analysis:
The template autocall that has been priced has the below terms.
Underlying market spot – The level for the underlying indices has been negatively
stressed. The assumption is that all markets are stressed by the same amount i.e.
the underlying indices are perfectly correlated.
Volatility surface – The whole of the volatility surface is parallel-shifted, again
across all the different underlying indices by the same amount.
Defensive autocall:
Standard autocall:
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6 year maximum maturity
GBP denominated
Worst of FTSE / S&P
50% European Knock-In barrier
Autocall barriers of:
100% / 93% / 86% / 79% / 72% / 65%
 Snowballing coupon of 9.0%
6 year maximum maturity
GBP denominated
Worst of FTSE / S&P
60% European Knock-In barrier
Autocall barriers of:
100%/100%/100%/100%/100%/100%
 Snowballing coupon of 12.5%
MTM analysis – June 08-June 09 – Defensive Autocall
The graphs below represent the effectiveness of the best-of put hedging tool over a period of market stress. It looks at the both an unhedged and a hedged position during the
period of June 2008 to June 2009.
It is assumed that the 6 year autocalls are launched at the same time as the 1 year 90% strike best-of put.
The red line shows how the MTM of the autocall would have changed over the period. The purple and blue lines represent the change in underlying markets and volatility
respectively. Finally, the green line represents what the total hedged MTM would have been throughout this period.
You can clearly see that the net MTM of the position is enhanced with this best-of put and the volatility is somewhat smoothed over the period.
Defensive Worst-Of Autocall
Standard Worst-Of Autocall
40%
40%
30%
30%
20%
-30%
-30%
-40%
-40%
-50%
-50%
Mar-09
Feb-09
-20%
May-09
Volatility Change
Dec-08
Market Change
Hedged
0%
-10%
Oct-08
May-09
Mar-09
Feb-09
Dec-08
Oct-08
Jul-08
Sep-08
-20%
Jun-08
0%
-10%
Unhedged
10%
Sep-08
Hedged
Jul-08
Unhedged
10%
Jun-08
20%
Market Change
Volatility Change
Alternative hedge – Macro hedge
As an alternative hedge the best-of put on a basket containing an equity index, copper and Swiss/Sterling exposure, provides exposure on a macro-level basis. The idea
behind this is if the global economy takes a downturn one would expect the following to occur:
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Equity market to fall in value – short the S&P 500 within the basket
Copper linked to general industrial output, with fall in economies, demand decreases and hence falls in value – short copper within the basket
Swiss franc viewed as a “safe haven” for cash, with movement of cash from GBP to CHF – short GBP versus CHF
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