Accumulator

Buy at a discount daily, until it goes wrong

An accumulator commits the buyer to purchase a fixed quantity of an asset at a discounted strike on every fixing date, for as long as the contract survives. It knocks out — ends — once the price rises above a level a little above spot, and it doubles the quantity bought on any day the price is below the strike. The upside is therefore capped by the knock-out and the downside is geared and runs to maturity, which is why the structure earned the nickname “I kill you later”.

Open in the app · Exotics · advanced

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What the lesson covers

1. What it is
2. How it works
3. Why it’s used
4. The asymmetry
5. Risks to watch

Key terms

• Strike — The discounted price at which the buyer takes delivery on each fixing date.
• Knock-out level — The price above spot at which the contract terminates early, capping the buyer’s gain.
• Gearing — The multiple — usually two — applied to the daily quantity on fixings below the strike.
• Daily quantity — The standard amount purchased on each fixing when the price is between the strike and the knock-out.
• Decumulator — The mirror structure, selling a daily quantity above spot and geared into a rally.
• Zero premium — A structure with no up-front cost, funded by options the client has sold rather than bought.

Every key term, A to Z

In practice

Accumulators are a private banking product, written on single shares, indices and currencies for clients with margin facilities. Regulators in Hong Kong and Singapore tightened suitability and disclosure requirements after the 2008 losses, and the structure is now generally restricted to professional or accredited investors — which is a statement about who was sold it before.

Read next

• Target Redemption Forward — A better rate that stops once you have won enough
• Barrier Option — A vanilla that switches on or off at a level
• OTC Equity Option — A custom, bilaterally negotiated option

In the app, Accumulator carries a five-step lesson, a worked example and a bank of twelve questions drawn differently every sitting.

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Educational content only. Nothing here is financial advice, an offer to trade, or a recommendation to buy or sell any instrument.