What Are Structured Products?

Since the end of the 1990s a new kind of class of financial instruments became popular, the so-called Structured Products. Structured Products are defined as a combined form of classical investment types with a derivative. They as well have fixed duration. All conditions are defined prior to the issue of the Structured Product and valid over the complete term.

Three different kinds of Structured Products are available:

1. Structured Products with capital protection: As they are an alternative to debenture loans, this category of structured products is characterized by an agreed repayment at the due date. Furthermore an additional return can be earned, if the expected market scenario is taking place. So the attractive return potential, which has far less risks as traditional investments, is one of the biggest advantages of structured products with capital protection.

Nevertheless also risks are of course bound to this investment option: Mainly the credit risk and the risk of changes in the share price, if you have to sell before the due day have to be named. And as also mentioned at the end of the article the capital protection can be sometimes dearly bought with high and very often inransparent fees in combination with an acquisition fee.

2. Structured Product with maximal return, which are an alternative to classical shares. Generally SPs with maximal return are structured with the buy of an underlying asset and the sale of a call-option or the buy of fixed-interest investments and the sale of a put-option. An advantage is that the investor abstains at a certain point from the earnings potential and gets compensation in form of an interest payment. An optimization of the return can be mostly expected, if a sideways movement of the stock market happens. Main risk is here is once again the market risk, especially which is base of the underlying asset.

3. Certificates are as well an alternative to shares. A concentration on a certain market, region or branch could be beneficial. As the performance is traceable at any time the significant market risk can only be avoided by spreading.

Furthermore all Structured Products can be sold at the secondary market.

There are several advantages of Structured Products. The fact that for nearly every market expectation, every approach to risk and therefore every return goal, as well as for the most different asset management needs a specific, individual and customized product can be designed very quickly. It´s much easier access to new markets like raw materials or emerging economies, which was so far available only for institutional investors. Thanks to the derivate in the product basket a positive return can be reached not only with rising but also with stagnating or even falling markets. Plus, the fact that transaction costs can be minimized as a product basket with derivate, underlying assets and an interest payment can be bought in comparison to many single products - in the same way the risk is spread to a range of different assets.

On the other side Stuctured Products are often considered to bear the following risks. Intransparent and high fees, as only the issuer knows the exact amount and no standard calculations are available. Investors - especially in the private sector are faced with a wide range of products, that are neither categorized nor standardized but named with fantastic and promising titles. So it is very complicated for non-professionals in that area to evaluate the product.

Article Source: Andreas Grau

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