How does the seller of an accumulator (whether it's agricultural, equity, fx) capture profit? I understand that whenever the accumulator is in a "double up" period, they capture the difference between the accumulation price and the market price. But if the accumulator never doubles up, is it still possible to hedge the premium given to the holder of the accumulator and make a profit? It seems to me that unless the accumulator knocks out, or is in double up for a large period of time, it is always a losing trade for the seller.

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Accumulator product from a Seller's point of view is to get a guaranteed fixed price for the underlying asset [agricultural, equity, fx etc] over a period of time, typically a Year. The Seller's normally holds the underlying assets and has hence entered to sell at fixed price although at a small discount to the market price.

Advantages to Seller:
• Ensures fixed price for the asset over the period of accumulation irrespective of market price.
• Limited Loss if price goes up: If the price of underlying asset has gone up during the period, the Seller would have made more money selling directly. However this is limited as the contract expires based on the Knock Out price. Typically 5% more than the initial market price.
• Unlimited Profit if the price goes down: If the price of underlying asset has gone down during the period, the Seller has made huge profit by accumulator, compared to what he would have got if he sold directly in the market.

Disadvantage to Seller:
• If the price is range bound between the strike and discount price, Seller is at loss. However this is typically in the range of 5-8%.

In other words Seller has hedged his risk by paying a small premium.

Whether the Seller can hedge this risk of loss, not too sure. The Accumulator itself is a very sophisticated derivate instrument, and then hedging the risk against this which is small percentage, the amount of premium paid would be equal to the loss. In the end there are no derivative instruments that will always bring profits to everyone. If there were such products we all would have been rich.

  • What about this technique coupled with an options strategy that will generate profit if the underlying doesn't move much such as a Short straddle, or something similar.
    – psatek
    Feb 15, 2012 at 14:34
  • @psatek that's what I was thinking about too. You need something that would generate profit if the underlying doesn't knockout so that you can cover the difference between the underlying and the accumulation level. Feb 15, 2012 at 17:53

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