A dealer sells a one-year autocallable on a single stock that redeems early at par plus a 9% coupon if the stock is above its start level on any quarterly observation, and returns capital reduced one for one if the stock finishes below 70% of the start. State the dealer's main exposures and what happens to them as the stock falls toward the barrier.

A dealer sells a one-year autocallable on a single stock that redeems early at par plus a 9% coupon if the stock is above its start level on any quarterly observation, and returns capital reduced one for one if the stock finishes below 70% of the start. State the dealer's main exposures and what happens to them as the stock falls toward the barrier.

Approach: Decompose the note into the funding leg, the digital-style call feature and the short down-and-in put, then track how each greek behaves as spot approaches the 70% level.

The dealer is long a short-dated digital on the autocall level and long a down-and-in put on the 70% barrier, so the book is short skew and short downside vega, and both exposures grow violently as spot falls toward the barrier. The investor's coupon is funded by selling that deep put, so the dealer starts long vega near the money and flips to short vega once the stock is near 70%, where the barrier makes the position behave like a short digital with unstable delta. Dividend and borrow risk sit on the same trade, because the autocall probability depends on the forward, and a dividend cut raises the chance the note survives to the barrier. The exposure that hurts most is correlation across the dealer's whole book: these notes are sold in size on the same handful of names, so a market-wide fall pushes every barrier toward its trigger at once and there is no one to buy the wing back from. That concentration is what makes the position dangerous rather than the greeks of any single note.

Follow-up: The autocall triggers at the first observation. What does that do to the dealer's aggregate vega and why is the timing a problem?

Key concepts: autocallable, down-and-in put, skew, vega, barrier risk.