Accumulator (structured product)
Encyclopedia
Accumulators are financial derivative
products sold by an issuer (seller) to investors (the buyer) that require the issuer to sell shares of some underlying
security
at a predetermined strike price, settled periodically. This allows the investor to "accumulate" holdings in the underlying
security
over the term of the contract.
The basic idea of an accumulator contract is that the buyer speculates a company will trade between a certain price range (the range between the strike and the knock out price) within the contract period, and the issuer bets that stock will fall below the strike price. Note that the buyer holds an obligation to buy the shares at the strike price and not the option to buy. Likewise, the issuer holds an obligation to sell shares at the strike price.
http://s.wsj.net/public/resources/images/MI-AY543A_ACCUM_NS_20090831184700.gif
. They will usually include the following:
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
products sold by an issuer (seller) to investors (the buyer) that require the issuer to sell shares of some underlying
Underlying
In finance, the underlying of a derivative is an asset, basket of assets, index, or even another derivative, such that the cash flows of the derivative depend on the value of this underlying...
security
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
at a predetermined strike price, settled periodically. This allows the investor to "accumulate" holdings in the underlying
Underlying
In finance, the underlying of a derivative is an asset, basket of assets, index, or even another derivative, such that the cash flows of the derivative depend on the value of this underlying...
security
Security (finance)
A security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
over the term of the contract.
The basic idea of an accumulator contract is that the buyer speculates a company will trade between a certain price range (the range between the strike and the knock out price) within the contract period, and the issuer bets that stock will fall below the strike price. Note that the buyer holds an obligation to buy the shares at the strike price and not the option to buy. Likewise, the issuer holds an obligation to sell shares at the strike price.
http://s.wsj.net/public/resources/images/MI-AY543A_ACCUM_NS_20090831184700.gif
Contract specifications
Like any financial option, the terms of the accumulator is specified on a contract between the two counter parties in the term sheetTerm sheet
A term sheet is a bullet-point document outlining the material terms and conditions of a business agreement. After a term sheet has been "executed", it guides legal counsel in the preparation of a proposed "final agreement"...
. They will usually include the following:
- The Reference Shares ("the shares"), or the underlying security of the contract.
- The quantity and class of shares(if there are more than one class).
- The strike price, also called the exercise price. This is price at which the issuer will sell shares to the investor.
- The settlement dates, this is the dates on which shares will change hands from the Issuer to the buyer. There should be more than one settlement day in an accumulator contract, or else it will not be "accumulating".
- The knock out price, this sets the top limit price the underlying equity can reach before the contract is "knocked out" and whatever outstanding shares accumulated prior to that day are settled
- Shares per day, this is the maximum amount of shares the buyer can "accumulate" per day.
- The trade day, this is the day the contract was sold/bought.
- The first accumulation day, this is the day that accumulation begins.
- The Initial Knock-out day, this is the first day that knock out can occur.