| name | workflow-derivatives-structured-products |
| description | WHAT: Price structured notes (autocalls, reverse convertibles, range accruals, principal-protected notes); decompose each product into its vanilla component instruments; assess embedded-option fair value and investor net economics.
WHEN: Invoke for structured product mark-to-market, embedded-option valuation, retail-product fairness check, or when decomposing a structured note into its bond floor and derivative overlay for accounting or risk management purposes.
|
Structured Products Pricing and Decomposition
What this skill covers
A pipeline for pricing and decomposing structured investment products into their constituent components. Every structured note is treated as a combination of a zero-coupon bond (or coupon-bearing bond) and one or more embedded derivative positions. Pricing uses the appropriate tool for each component type: structured_note_pricing for standard catalog products, exotic_product_pricing for non-standard payoffs, monte_carlo_simulation for path-dependent features, and convertible_bond_pricing for equity-linked convertible structures. The output establishes a fair-value breakdown that supports both client disclosure and internal risk reporting.
Workflow
Phase 1 โ Product Classification
- Classify the structured note by payoff type:
- Principal-protected note (PPN): zero-coupon bond + long call.
- Reverse convertible: coupon bond + short put (investor is short the downside).
- Autocall / Autocallable: callable structure with conditional coupons and barrier observation.
- Range accrual: coupon accrues only on days the underlying closes within a defined range.
- Convertible note: bond with equity conversion option (long call on issuer equity).
- Custom / exotic: any payoff not covered above; treated via Monte Carlo.
- Document: underlying(s), notional, tenor, coupon / participation rate, barrier levels, call schedule, and protection level.
Phase 2 โ Funding Leg (Bond Floor)
- Source the issuer's credit spread:
- Call
credit_spreads or fmp_quote for the issuer's CDS or bond yield spread over the risk-free curve.
- Compute the bond floor (present value of the capital repayment and any fixed coupons):
- Use
bond_pricer with the issuer's all-in discount rate (risk-free rate + credit spread) and the scheduled cash flows.
- For principal-protected notes: bond floor = PV of par repayment at maturity. The residual budget = issue price minus bond floor = maximum option budget.
Phase 3 โ Embedded Derivative Valuation
- Vanilla components (calls, puts, spreads): call
option_pricer per leg using Black-Scholes or binomial as appropriate. Source volatility from implied_volatility or the vol surface from workflow-derivatives-vol-surface.
- Autocall and barrier features: call
structured_note_pricing with the product type set to "autocall" or the relevant catalog identifier. Required inputs include barrier level, observation frequency, conditional coupon, and early redemption premium.
- Exotic / path-dependent payoffs: call
exotic_product_pricing for Asian options, barrier options, or lookback features embedded in the note.
- Monte Carlo path-dependent pricing: call
monte_carlo_simulation with the payoff function specified as the simulation rule. Minimum 10,000 paths; document path count, seed, and distributional assumptions (log-normal for equity; Hull-White for rate underlyings).
- Convertible equity-linked structures: call
convertible_bond_pricing using the CRR binomial tree with the specified conversion ratio, call/put provisions, and credit spread. Extract: bond floor, conversion premium, CB delta, and investment vs parity value.
Phase 4 โ Decomposition and Fairness Check
- Assemble the component price table:
- Issue price = Bond floor + Embedded option value + Distributor margin.
- Compute implied distributor margin: Issue price minus (bond floor plus fair option value).
- Benchmark: distributor margin > 3% of notional for a 1-3 year structured note is a red flag for retail fairness.
- Call
sensitivity_matrix with the underlying spot ยฑ10% / ยฑ20% and implied vol ยฑ5 vol points to produce the structured note's price sensitivity grid.
Phase 5 โ Investor Net Economics
- Compute the investor's breakeven:
- For capital-at-risk products: the underlying must close above the barrier at maturity for the investor to recover principal; compute the barrier return required.
- Effective yield: if the investor simply reinvested in the risk-free rate over the same tenor, what terminal value would they receive? Compare to the expected payout from
monte_carlo_simulation (mean path outcome).
- Document the investor's economic position versus a simple bond + direct equity investment alternative.
Output Format
Product Classification and Terms
| Field | Value |
|---|
| Product type | โ |
| Underlying | โ |
| Notional | โ |
| Tenor | โ |
| Issue price | โ |
| Coupon / participation rate | โ |
| Barrier level | โ |
| Capital protection level | โ |
Component Decomposition
| Component | Type | Tool Used | Fair Value | % of Issue Price |
|---|
| Bond floor | Zero-coupon bond | bond_pricer | โ | โ |
| Embedded option(s) | Call / put / barrier | option_pricer / exotic_product_pricing | โ | โ |
| Monte Carlo correction | Path-dependent feature | monte_carlo_simulation | โ | โ |
| Distributor margin | Residual | Implied | โ | โ |
| Issue price (total) | | | โ | 100% |
Monte Carlo Output (if applicable)
| Metric | Value |
|---|
| Path count | โ |
| Seed | โ |
| Mean payout | โ |
| 5th percentile payout | โ |
| 95th percentile payout | โ |
| Probability of capital loss | โ |
Convertible Bond Metrics (if applicable)
| Metric | Value | Source |
|---|
| Bond floor | โ | convertible_bond_pricing |
| Conversion premium | โ | convertible_bond_pricing |
| CB delta | โ | convertible_bond_pricing |
| CB category | Investment / Balanced / Busted | convertible_bond_pricing |
Sensitivity Matrix: Note Price vs Spot and Vol
(5 ร 5 grid โ output from sensitivity_matrix)
Investor Economics Comparison
| Scenario | Structured Note Payout | Simple Bond + Equity Payout |
|---|
| Bear (underlying โ30%) | โ | โ |
| Base (underlying flat) | โ | โ |
| Bull (underlying +30%) | โ | โ |
Tool-Call Traceability
Quality Gates
Related Skills
workflow-derivatives-option-pricing โ vanilla component pricing for each embedded option leg.workflow-derivatives-vol-surface โ vol surface inputs for exotic and barrier option components.workflow-derivatives-swaps โ interest rate swap components embedded in structured rate notes.corp-finance-analyst-derivatives โ agent body with CB benchmarks (balanced: 20-40% premium, delta 0.4-0.6; busted: >60% premium, delta <0.3) and Monte Carlo conventions.
