Structured products are pre-packaged financial instruments that are created by investment banks or financial institutions. They are designed to meet specific investment goals that cannot be met with standard financial instruments like stocks or bonds alone.
In simple terms:
Structured products combine different derivatives (like options) with traditional securities (like bonds) to offer customized risk-return profiles.
Key Features
Underlying Asset: Could be a stock, index, interest rate, currency, or commodity.
Derivatives: Usually involve options to create a specific payoff structure.
Debt Instrument/Base Note: Often includes a bond or note that pays fixed income or returns principal (sometimes partially or conditionally).
Example
A structured note might:
Return your full principal at maturity
Plus a percentage gain if the S&P 500 stays above a certain level
But no gain if it drops below a threshold
Benefits
Custom returns: Tailored to an investor’s view (e.g. bullish, bearish, or neutral).
Capital protection: Some offer partial or full principal protection at maturity.
Access to exotic markets or assets: Without directly owning them.
Risks
Complexity: Hard to understand without a solid grasp of derivatives.
Liquidity: Often not traded on an exchange; hard to sell before maturity.
Credit risk: Dependent on the issuer’s ability to pay back.
Market risk: Returns may be linked to volatile underlying assets.
