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Wealth Management

Understanding the Basics of Structured Products


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Structured products are complex financial instruments. They are created to meet specific investment strategies by combining traditional securities such as bonds with derivatives. These products offer customized solutions to achieve a variety of investment objectives, including principal protection, income, growth, and market exposure.

Why Invest in Structured Products?

  • Customization: Tailored to specific market views or investment strategies.
  • Potential for Enhanced Returns: Can offer higher returns compared to traditional fixed-income products in certain market conditions.
  • Risk Management: Features like principal protection can be integrated, depending on the product structure.

Types of Structured Products

  • Principal Protected Notes: Offer guaranteed return of principal, subject to issuer credit risk, with potential for additional returns linked to a specific asset or index.
  • Yield Enhancement Notes: Aim to offer higher income than traditional bonds through options strategies, with potential trade-offs in terms of risk.
  • Market-Linked Notes: Returns are tied to the performance of a specific market index or basket of assets, without direct investment in those assets.

Key Features

  • Capital Protection Level: The extent to which the principal is protected, ranging from partial to full protection.
  • Underlying Asset: The asset or benchmark the structured product’s performance is linked to, such as equities, indexes, or commodities.
  • Maturity Date: The date on which the structured product expires, and the issuer is supposed to return the principal and any additional returns.

How Structured Products Work

  • Purchase: Investors buy a structured product at its issue price, which may include embedded fees and costs.
  • Performance Link: Returns are based on the performance of the underlying asset or index, according to predefined rules.
  • Payout: At maturity, investors receive a return based on the agreed-upon conditions, which might include capital protection and/or a performance-linked return.

Risks and Considerations

  • Complexity: The use of derivatives can make it difficult to understand risk and return profiles.
  • Credit Risk: Returns are also dependent on the issuer’s ability to meet its financial obligations.
  • Market Risk: Exposure to underlying assets can lead to losses, especially in volatile markets.
  • Liquidity Risk: They may be difficult to sell before maturity, potentially leading to losses if sold early.

Structured products can be an effective tool for sophisticated investors looking to tailor their investment strategy. However, understanding their complex nature and associated risks is crucial before investing.

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