Structured products are synthetic investment instruments specially created to meet specific needs that cannot be met from the standardized financial instruments available in the markets. Structured products can be used: as an alternative to a direct investment; as part of the asset allocation process to reduce risk exposure of a portfolio; or to utilize the current market trend; or investor view.
Structured products are usually issued by investment banks. They have a fixed maturity, and have two components: a note and a derivative. The derivative component is often an option. The note provides for periodic interest payments to the investor at a predetermined rate, and the derivative component provides for the payment at maturity. Some products use the derivative component as a put option written by the investor that gives the buyer of the put option the right to sell to the investor the security or securities at a predetermined price. Other products use the derivative component to provide for a call option written by the investor that gives the buyer of the call option the right to buy the security or securities from the investor at a predetermined price.
Structured transactions are complex and may involve a high risk of loss. Prior to entering into a transaction you should consult with your own legal, regulatory, tax, financial and accounting advisors to the extent you consider it necessary, and make your own investment, hedging and trading decisions (including decisions regarding the suitability of this transaction) based upon your own judgment and advice from those advisors you consider necessary.
Every structured product has its own risk profile since the risks of their individual components may be reduced, eliminated or increased. Since there is almost limitless potential to combine product elements, we cannot go into detail here about the risks involved in any particular case. Hence it is particularly important that you are fully aware of the risks involved before acquiring any such product. Such information can be found, for example, in the relevant product literature.
Before you invest in any structured product you should thoroughly review the particular investment’s offering document(s) and related material(s) for a comprehensive description of risks and considerations associated with the particular investment. These may include but not be limited to, potential for loss; limited appreciation; issuer or guarantor credit risk; little or no secondary market; volatility of the underlying asset, potential for lower comparable yield than that of a conventional fixed rate debt security of the same issuer with comparable maturity; tax consequences and conflicts.
Structured products involve risks including but not limited to the following:
- Credit risk – structured products are unsecured debt from investment banks.
- Lack of liquidity – structured products rarely trade after issuance and anyone looking to sell a structured product before maturity should expect to sell it at a significant discount.
- No daily pricing – structured products are priced on a matrix, not net-asset-value. Matrix pricing is essentially a best-guess approach.
- Highly complex – the complexity of the return calculations means few truly understand how the structured product will perform relative to simply owning the underlying asset.