A client signs a one-year accumulator: buy 1,000 shares a day at Rs 900 on a Rs 1,000 stock, the deal ends if it closes above 1,050, and the client buys 2,000 a day below 900. Work three price paths.

Path A ends after seven days with 7,000 shares and a gain of about Rs 11.2 lakh; path B delivers 250,000 shares for Rs 22.5 crore, worth Rs 1.25 crore more at 950; path C delivers 460,000 shares for Rs 41.4 crore, a loss of Rs 9.2 crore at 700. The discount is the premium for a strip of puts the client has sold in double size, and the knock-out caps the only path on which the client wins.

A shop that offers you 10% off milk every day, but cancels the offer the moment milk gets dear and forces you to buy double when nobody wants milk, is not giving you a discount. On path A the stock closes at 1,060 on day 8, above the 1,050 barrier, so the contract ends after seven purchases: 7,000 shares at 900 against a market of 1,060, a gain of 160 a share, Rs 11.2 lakh, and the remaining 243 days of discount vanish. On path B the stock sits at 950 all year: 1,000 shares a day for 250 days is 250,000 shares for Rs 22.5 crore, worth 50 a share more at the year's end, Rs 1.25 crore. Path B is the one the brochure is written about.

Path C is where the product shows its construction. For the first 40 days the stock is above 900 and the client buys 1,000 a day, 40,000 shares. From day 41 the stock is below 900 and the doubling featureA clause in an accumulator that requires the client to buy twice the daily quantity on any day the stock closes below the strike, which is where the dealer recovers the discount. applies: 2,000 shares a day for the remaining 210 days, 4,20,000 shares. The client ends with 460,000 shares bought at 900 for Rs 41.4 crore, and at a market of 700 the position is worth Rs 9.2 crore less than it cost. There is no barrier on the way down, so the losses run until the contract expires.

Strip it into options and the discount explains itself. Each day the client is long a call struck at 900, which is why buying at 900 below 1,050 is a gain, and short two puts struck at 900, which is why the quantity doubles below 900; the knock-out makes every call disappear once the stock is 1,050 or higher. The client has sold a strip of puts in double size to fund a strip of knocked-out calls, and the 10% discount is the net premium of that package paid out as a lower purchase price. Path A shows the calls being cancelled, path C shows the puts being exercised, and the dealer is hedged on both.

Three things, with numbers. The maximum commitment is 500,000 shares at 900, Rs 45 crore, if the stock is below 900 every day, so the client needs that cash or that credit line, not the Rs 22.5 crore of the brochure case. The gain is capped by the barrier at roughly 150 a share on whatever has been bought before the knock-out. And the client should want the stock at 900 or lower anyway, because the product is a commitment to buy it there in size. Say the limits of the working: the paths are stylised, dividends and the mark-to-market collateral the dealer will demand on path C are ignored, and the valuation of the strip depends on the stock's volatility and skew, which is what a desk would price before quoting the 10%.