Structured products are pre-packaged financial products
designed to facilitate customized risk return objectives. They are based on a traditional security with
modified payment features linked to the performance of an underlying asset. There is no strict formula for the
composition of structured products but they are generally based on derivatives,
baskets of securities, options, swaps, commodities, or indices. Because of the highly customizable nature of
these products, examining a few examples of is the best way to acquire a basic
understanding of them.
Many
structured products perform a principal guarantee function in the form of what
is essentially an accrual bond. An
accrual bond, sometimes called a “zero-coupon bond,” is a security that does
not pay interest payments but is purchased at a discount and redeemed for its
face value at maturity. In addition to
this principal guarantee, a structured product will have a second component
contingent upon the performance of an underlying equity instrument. For instance, the second component in this
example could be a call option on an equity index that pays a predetermined
amount for gains above a predetermined level.
As a second
example, let us look at a structured product recently featured on the AVC
advisory website. This structured
product offers a quarterly coupon payment of 2.1% for a period of five
years. This 8.4% potential yearly yield
is contingent upon the performance of three developed world stock indices. So long as the three indices do not fall more
than 40% from their initial value at the end of the previous quarter investors
will earn the quarterly interest payment.
Unlike the prior example, there is risk of principal loss with this
product if any equity index is lower than 60% of the strike level at the time
of the notes’ maturity.
These two
examples are examples of growth products and income products respectively. Growth products provide a level of capital
protection whereas income products provide a higher income with a risk to the
capital return. Generally, principal
protection features are traded for a variety of performance features. Different types of structured products give
the investor flexibility and allow him or her to invest in accordance with his
or her personal expectations.
Despite
their recent surge in popularity, structured products are occasionally
criticized for their illiquidity. The
highly customized nature of the investment makes them a buy-and-hold asset. Some innovations have been explored such as
exchange-traded-notes, a product made to resemble an ETF composed of debt
instruments with returns contingent upon the performance of an underlying
asset. The customized nature of the
structured product also makes for pricing, rating, and regulation difficulty. Investors should work closely with their
financial advisor in order to perform the extra level of due diligence
recommended before investing in a structured product.
One of AVC
Advisory’s core financial instruments is the structured product. Our experienced team members are more than
happy to work with investors interested in finding a structured product that is
right for them.
0 коммент. :
Отправить комментарий