Structured products are investment tools made by banks that have numerous potential benefits for investors, including capital protection, risk/return profile optimisation and diversification.
They can allow investors to invest in areas to which they would not otherwise have access.
They can also be customised to meet investors’ specific objectives in current and expected market conditions – for example, to protect against a downturn or to take advantage of an expected rise.
For a product to be considered “structured”, it must comprise at least two components, most typically a bond and an option. The customer buys the product “prepackaged” rather than acquiring the elements separately.
A role in the real economy
Structured products play a role in the real economy. First, they offer solutions to investors – not only individuals, but also pension funds and insurance companies. Also, when banks create structured products they invest in traditional assets to cover their risks (option component), and they also issue bonds, which allows them to shore up their financial solidity and thus their capacity to finance the economy.
Structured products are taking on an increasingly important role in the changing landscape for investing, and more and more investors are adding structured products to their portfolios. Different kinds of structured product can be used by various types of investors, including retail clients. Global legislation has considerably increased the transparency of this market, which is highly regulated.
Structured products: a basic example
5-Year Principal Protected Notes Linked to the S&P 500® Index
What does that mean?
At maturity, investors will receive their initial capital back plus a percentage of the upside performance of the S&P 500® Index, if any, during the life of the Notes.
How is it built?
A Principal Protected Note on the S&P 500® Index essentially replicates 2 components:
- A Zero-Coupon Bond: a debt instrument sold at a discount from par (100%) and which pays par (100%) at maturity.
- A Call Option on the S&P 500® Index: paying some amount of any positive performance of the S&P 500® Index.
RESULT: In this example, the investor would get a 5 Year Principal Protected Structured Product with the following payoff formula:
100% of initial Capital invested +a percentage of the 5-year positive performance of the S&P 500® index (if any)
If the S&P 500® index has a negative performance at the end of 5 years, investors will only receive their capital at maturity.