Structured products are financial instruments whose performance or value is linked to that of an underlying asset, product, or index. These may include market indices, individual or baskets of stocks, bonds, and commodities, currencies, interest rates or a mix of these.
Because of their huge variety, there is no simple definition—or uniform formula to calculate the risk and payoff—of structured products.
Generally, most structured products incorporate “options”, a type of derivative product that can give investors the right to buy or sell something at a pre-determined price (called “Strike Price“) and date. It can also involve the investor giving a financial institution the right to buy from or sell to him something at a pre-determined price.
In a “call” option, the option holder has the right to buy the underlying asset at a certain price. In a “Put” option, the option holder has the right to sell the underlying asset at a certain price…Read more.
Structured products are a pre-packaged investment strategy where the payout or return of the investment is often linked to the performance of an underlying reference (a single security like a share or bond, a basket of securities, indices, commodity price etc). Structured products are becoming increasingly popular with investors as they provide access to a market that can be tailor-made to suit the demands and views of investors. Furthermore, the level of derivative knowledge is more widespread among investors who are now more comfortable investing in a non-traditional asset class.
In Malaysia, structured products are offered to the following sophisticated investors’:
Accredited investors — include Capital Markets Services Licence (CMSL) holders, executive directors or chief executive officers of CMSLs, licensed banks, insurance companies, unit trusts or approved closed end funds
High net worth entities — include trust companies or public companies approved as a trustee with assets under management exceeding RM10 million or entities with total net assets of more than RM10 million.
High net worth individuals — individuals who have total net personal assets of RM3 million excluding the value of his or her primary residence, a gross annual income of more than RM300,000 in the preceeding 12 months, or jointly with his or her spouse has a gross annual income exceeding four hundred thousand per annum in the preceeding 12 months.
A requirement for risk-adjusted returns is the main driver of investor demand for structured products in recent years. The highly customisable nature of structured products is able to cater to a specific investor’s risk/return profile and investment objectives. These objectives may include principal protection, diversification, yield enhancement, leverage, regular income, tax/regulation optimisation, and access to non-traditional asset classes, among others. As an investment product which has the mixed characteristics of bonds, equities or any other asset, it produces returns with different levels of correlation to traditional assets. This translates into higher expected return for any given level of risk in an investment portfolio.
Structured products also offer investors exposure to a particular financial market by taking a view on market movements. Investors are able to choose structures with returns dependent upon movements of a predetermined index, basket of stocks or group of indices of international markets. This allays investors’ concern about entering into unfamiliar markets since structured products provide for a degree of downside protection while leveraging upside participation.
Summary
An immerse range of products, innovations, technologies and investment avenues have penetrated the financial market in the last decade. More and more, new investment opportunities infiltrate the evolving current financial state. Among them, structured products are a mode of investment for addressing for addressing the risk-return balance. Structured products provide an entire range of market exposure, anything from conservative to aggressive instruments, on giving investors opportunity to gain from the individual market views and capitalise on perceived market drift to accomplish preferred economic benefits.
Structured products provide investors with alternative investment strategies. With their wide range of diversification, structured products assist in mitigating portfolio risk thereby controlling volatility and for a finer focus on financial goals. structured products allow investors to have an individualistic view of the market and achieve desired results irrespective of whether the market is bullish or bearish in trend.
As with any investment product, there are going to be some investors for whom structured products will not be suitable, but the introduction of more structured products to the market does give investors greater choice, and the option to express a greater range of investment views. Perhaps investors need to be cautious not to be seduced by headline rates, and to ensure they understand the additional risk they are taking on with these products. they must also be aware that the additional value from the extra risk being taken on does not necessarily need to be used to give a greater return. It can be used to reduce risk elsewhere.
The success of structured product issuance to date can be attributed to the dynamic derivatives market and willingness by investors to buy a variety of different domestic securities.
Self-Assessment / Activity
1. Structured investment products are tailored, or packaged, to meet certain financial goals of investors. Which of the following are motivations for investing in structured products?
I. Yield enhancement
II. Portfolio diversification
III. Seeking principal protection
IV. Hedging against volatility of currencies
A. I, II and III only
B. I, III and IV only
C. II, II and IV only
D. All of the above
2. One of the principal attractions of structured products is the ability to customize a variety of features into one instrument. Which of the following statements are CORRECT?
I. Structured products are an investment vehicles that are linked to the performance of a basket of underlying references, such as equities, debts, commodities, indices, currencies, or any combination thereof.
II. Structured products are created mainly to meet the financial needs of individual investors.
III. Structured products may have a range of possible payouts
IV. Structured products with principal protection expose investors to the risk of the issuer.
A. I and II only
B. I, II and III only
C. I, III and IV only
D. None of the above
3. All of the following statements relating to structured products with principal protection are RELEVANT except?
A. There may be additional cost to the investor for securing the protection.
B. For investors of a protected product, there is still risk on principal repayment.
C. For a protected product, the strength of the protection is dependent upon the financial strength of the underlying reference.
D. The protection is subject to the financial strength of the issuer.
4. Which of the following describes the payout structure of a range actual structural product?
A. Payouts that are predetermined by the performance of more than one underlying reference.
B. Payouts that are fixed after the underlying reference price exceeds the strike price.
C. Payouts for situation where the price of the underlying reference stays within a certain range.
D. Payouts upon the occurrence of certain predetermined events.
5. Structured products may include a provision that allows for the issuer to retire all or part of issue before maturity. Investor of such structured product are said to be exposed to risk known as:
A. Market risk
B. Call risk
C. Credit risk
D. Mismatch risk
Additional Questions:
1. A structured product usually consists of?
A. indices
B. securities
C. derivatives
D. All of the above
2. Structured products are:
A. Synthetic investment instruments
B. Specifically to meet specific need that cannot be met from standard financial instruments
C. often include the use of various derivatives
D. All of the above
3. Which of the following is NOT true about structured products?
A. They lack of liquidity
B. The full extent of returns can be realized before maturity
C. They can provide access to hard-to reach exposures
D. All of the above
4. Which of the following is risk of investing in structured products?
A. credit risk
B. pricing transparency
C. product complexity
D. All of the above