Worst-of INDU / NDXT / RTY Contingent Income Auto-Callable Securities — Simulation Report

The note behaves like a high-coupon, short-dated, worst-of “phoenix”: most of the time it is called early and the investor collects coupons and par, but a minority of paths suffer severe, unprotected downside when the weakest index falls below 70% of its starting level.

• Contingent quarterly coupon (~11.75% p.a.). Every quarter you receive a coupon only if all three indices are at or above 80% of their starting level on that day. If even one index dips below 80%, that quarter’s coupon is skipped.
• Automatic early redemption. Starting after 6 months, on each quarterly date the note is called (redeemed at par $1,000 plus the coupon) if all three indices are at or above 100% of their start. Once called, the note ends.
• Maturity. If never called and the worst index finishes at or above 70% of its start, you get par ($1,000) plus any final coupon. If the worst index finishes below 70%, you lose 1:1 — e.g. −50% gives $500, −100% gives $0.
• Upside is capped. You never participate in index gains; the maximum is par plus coupons.

In short: the investor is paid an attractive coupon to sell worst-of downside protection below a 70% barrier, while upside is capped and the note is likely to be redeemed early.

Benchmark = equal-weight basket of the three indices (price return, plus a blended ~0.80% dividend yield). The “same-horizon” benchmark column measures the basket only over each path’s realized holding period; because early redemptions trigger precisely when the market has rallied, this column understates holding-period length and inflates the annualized figure (many paths are annualized from a 6-month rally). The unconditional 24-month buy-and-hold reference (≈9.60% annualized) is the fairer “do-nothing” comparison.

• Worst case (negative return): 8.46%
• Best case (>10% annualized): 75.1% (the note most often delivers close to its coupon rate)
• Beats the risk-free rate (~3.84%): 89.2%

Interpretation of the numbers. On average the note returned +5.16% over an ~12-month realized holding period (≈ an 8.15% annualized rate). Because roughly half of all scenarios end at the 6-month first call, the annualized figure reflects short holding periods and should be read together with the total return and holding period, not in isolation. Over the same realized horizons the equal-weight basket averaged +9.55% total return, so the note trades part of the equity upside for a coupon and a partial capital buffer.

Favorable characteristics

• Attractive coupon: ~11.75% p.a. contingent income — several times the ~3.8% risk-free rate — paid quarterly, with coupon income driven by staying above an 80% barrier rather than by index appreciation.
• High early-redemption rate (~77%): most scenarios lock in the coupon within one year, and ~91.5% of scenarios return at least the original principal.
• Much lower volatility (9.4%) than the underlying equity basket (~18.9%), with a meaningful cushion before losses begin (coupon barrier 80%, principal barrier 70%).
• Consistently clears the risk-free rate in ~89% of scenarios.

Risks and drawbacks

• Capped upside: the investor never participates in index gains; a strong bull-market path forgoes large upside (benchmark buy-and-hold averaged ~+20% over two years versus the note’s ~+5%).
• Worst-of linkage: tying the barrier and coupon to the weakest of three indices raises the chance of a missed coupon or barrier breach versus a single-index note.
• Severe, unprotected tail: once the worst index ends below 70%, losses are 1:1 with no floor — the worst simulated path lost ~77%, and the 99% VaR (−30.65%) is worse than the basket’s (−22.61%). A minority of scenarios carries most of the risk.
• Conditional coupon: income can be interrupted whenever any one index closes below 80% on an observation date.
• Issuer and liquidity risk: exposure to Morgan Stanley’s credit, and limited secondary-market liquidity for an unlisted note.

This report is a quantitative, scenario-based evaluation of the note’s payoff profile and risk/return characteristics. It does not constitute financial, investment, tax, or suitability advice.

• scatter_returns.png — per-simulation product vs benchmark returns
• hist_product.png — product annualized-return histogram (stacked by holding period)
• hist_benchmark.png — benchmark annualized-return histogram (stacked by holding period)
• risk_return_scatter.png — expected return vs volatility (product, benchmark, risk-free)
• box_comparison.png — annualized-return box plot
• scenario_probabilities.png — worst-case / best-case / beat-risk-free probabilities
• pie_holding_period.png — distribution of holding period
• pie_coupons.png — distribution of number of coupons paid