Is simple: to create an investment product that combines some of the best features of equity and fixed income.
How can you accomplish this: by creating a mix of investments that can include bonds, equities, commodities, currencies and derivative products. The mix of investments in a basket determines its potential payout, level of capital protection, tenor, potential risks and other considerations.
To be more specific, a structured product is a synthetic instrument that appeared on financial markets in order to respond to the client’s need of portfolio diversification.
Through a structured product you can invest in a market, in a certain instrument or in a basket of instruments much more easily than going on that specific market where legal framework might be restrictive, costs are higher and practically impossible to directly invest in the desired security.
It is important to know that a structured product, as simple as it can be - and it is not always like this – always has a derivative attached. The derivative component is often an option. Some products use the derivative component as a put option, other products use the derivative component to provide for a call option.
These curios investment opportunities can be divided into 4 categories as their associated risk is getting higher:
- Capital protection;
- Partial capital protection;
- Certificates (not capital protected);
- Leveraged certificates.
Through these categories we can determine the client’s risk tolerance from very conservative to growth attitude.
The capital protection products protect a portion of the invested capital (up to 100%) and can offer some guarantees on investment performance. Capital protected products offer a defensive investment and might be an ideal way to invest in financial markets with little or no capital risk. The capital is protected only if the structure is held until maturity, it can guarantee a minimum coupon so that the downside of the structure is limited to a certain gain.
Partial capital protected products, as their name suggests, do not offer a 100% notional protection but the protection level can be established along with the investors depending on the structure, underlying, tenor and other determinants.
Certificates are mainly performance tracking products on single stocks, indices, sectors, themes, commodities, interest rates, currencies. The investment performance of these certificates will parallel to the underlying asset and the investors will not be able achieve outperformance. Performance tracking products are designed for medium to longer-term investors who want to invest in a specific market, sector, theme or underlying that are represented by a respective Certificate.
Leveraged products can offer to investors accelerated exposure to the underlying asset, can enable investors to participate on either side of the market benefiting from price increases (Long products) or price decreases (Short products). These types of Certificates are designed for self-directed active investors and have a high risk-return profile so they may not be suitable for inactive or conservative investors.
This was a short introduction in the structured products universe, basic information for retail investors who are opened to new types of investment alternatives and to innovative ideas that can offer a new perspective to the world we live in and its investment opportunities.
