Structured products are investments that have multiple components such as options or swaps. The aim is to construct a customised payout profile based on the risk-reward preferences and/or market outlook of a particular investor or group of investors. The most common type of a retail structured product is a bond plus an option – these tend to be standardised, sold in small tickets and large volumes. Structured products are largely issued by banks as a source of cheap funding. Managing the risks of large structured products portfolios is one of the biggest challenges dealers face. Some products offer full capital protection. In a typical retail structured product, enough of the principal is invested in cash to ensure a payout of 100% at maturity. The remainder is invested in call options or other derivatives on the underlying index, as determined by the product terms. When interest rates are low, full capital protection becomes more difficult to structure, given the large amount of principal that must be invested in cash. Popular products include reverse convertible notes, which pay regular coupons derived from underlying equity performance. At maturity, holders receive 100% of principal, provided a knock-in level – typically 70–80% of the initial index reference price – has not been breached. If the reference price falls below the knock-in, investors receive shares with a value that is typically below the original investment. Autocallable notes, another type of structured products, are fixed-term debt instruments that incorporate an early kickout if the underlying asset hits an upside trigger level. Most incorporate a capital protection feature, with principal repaid in full if the bond does not knock out and does not fall below a downside barrier level.
STRUCTURED PRODUCTS
