Linear Payoff
Linear Payoff is a direct subtype of Contingent Payoff
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TYPE INCLUSION RELATIONSHIPS
AVAILABLE FUNCTIONS
AVAILABLE CREATE FUNCTION KEYS
TYPICAL OBJECTS OF TYPE Linear Payoff
This type represents the payoff in the context of a Structured Product, whereby the payment amount amt per unit notional depends linearly on the performance P(t) observed at time t of the applicable underlying.
Formally:
amt = mP(t) + c
where
m is a fixed multiplier specified through the key Payoff_Slope.
c is a constant specified through the key Payoff Intercept.
The performance P(t) is also known as growth factor and defined as the ratio S(t) / R, where S(t) is the price of the applicable underlying at time t and R is a fixed reference value stipulated in the contract.
Note that the observation time t as well as the timing of the settlement are both controlled by the applicable Structured Product and not defined here.
Example
In a ELN Stepdown Autocall there is a guarranteed capital return if K < P(t) < 100% with K a given fixed strike.
Otherwise, the investor suffers an equity-linked loss if P(t) < K but gains on the upside through equity participation if 100% < P(t).
Below is a schematic diagram of such a payoff.
The Equity Linked Loss red line segment on the left can be represented by a Linear Payoff that has m = 1 / K and c = 0.
If K = 90%, this gives m = 1 / 0.9 = 1.111111
The Principal-only horizontal black line segment on the middle can be represented by a Linear Payoff that has m = 0 and c = 1.
The Equity Participation green line segment on the right can be represented by a Linear Payoff that has m = 1 and c = 0.