Structured Products -2: An Overview

Structured Products : An Overview

Structured Products are alternative instruments to direct investments, providing for risk-return balance; thereby reducing the risk exposure of a portfolio.  Structured Products provide for protection of principal if the instruments are held until maturity. They have some features of bonds that pay regular income and offer capital protection and also of equities that provide greater returns, but the catch is they have higher risk exposure.

The nature of structured product is predeterminethe instruments are held until maturity. They have some features of bonds that pay regular income d before issuance and they remain the same throughout the life of investment. Structured products are designed to provide investors with highly targeted investments tied to their specific risk profiles, return requirements and market expectations. Structured Products provide for various levels of capital protection for diversified portfolios and can be exercised to boost returns. Suave investors can make perfect use of the derivative-linked instruments. These instruments may not be suitable for individual investors.

Various structured products available for investors are:

§         Equity-linked notes & CDs

§         Index-linked notes & CDs

§         Inflation-linked notes

§         Commodity-linked notes

§         Derivatives (futures, options and swaps)

§         Credit-linked notes

§         Currency-linked notes

Prime Characteristics of Structured Products:

      §         Alteration of Risk/return of underlying primary product

§         Impersonate the risk/return of an underlying instrument

§         Derivative is not considered as just a hedging instrument but an integral part of the structured product

§         Combine primary product and a derivative to form a complete structure.

Need For Structured Products:

 Principal Protection: Structured Products aid in capital protection, providing for better returns against the risk exposure.

Enhancement: The portfolio’s return can be amplified using structured products.

Diversification: Risk/ Returns can be diversified using structured products.

Alternative Asset Exposure: Structured products when linked to various instruments like precious metals, real estate, etc. provide returns based on alternative assets with varying degree of principal protection.

Growth: Structured products aid in growth of a portfolio by protecting the downside and gaining the upside of the portfolio.

Market View; Structured Products allow for capitalizing on a specific market view.

Income: Structured products resemble bonds in the sense that they provide for periodic income in exchange for assuming principal risk.

Structured Products- Part 1

Recent trends in the market have persuaded bountiful Institutional Fund Managers in reassessing and formulating massive transformation to the way they approach asset management. They are reacting to the immense volatility in Equity Markets witnessed in the current situation, specifically the bear market that is grasping the Financial Markets of the whole world; flanking the turbulence created by Sub-Prime crisis and stagnation in the world economies.

Fund managers have attempted a wide range of approaches to solve the setback they face. Those who were managing defined benefit pension funds have transferred a grand proportion of their portfolio into longer-dated bonds. The prime logic behind this switch is that long term bonds prove to be a better match than equities for their long term liabilities. A few others resort to hedge funds anticipating capitalization on the unconstrained, long/short strategies which these vehicles practice. This method does not favor all the investors. There are numerous investors, who cannot afford to invest in funds that take short positions for the reason that their statutes[1] or governing rules prohibit this method of investment. Also, hedge funds charge a relatively higher fee which makes it harder for the investors. And again, plentiful investors still stake on equity markets, which is ruled by volatility; providing an indistinct stance.

An immense 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 stance. Among them, Structured Products are exceptional mode of investment for addressing the Risk – Return balance. Structured Products can balance diversified portfolios by offering efficient market exposure and risk/return balance which was previously accessible only to Institutions and High-Net worth individuals.

Structured Products provide for an entire range of market exposure, anything from conservative to aggressive instruments, giving the investors opportunity gain from the individual market views and capitalize on perceived market drift to accomplish preferred economic benefits. Structured Products easily facilitate the investors in meeting one or more investment objectives. With their wide range of diversification, Structured Products assist in mitigating portfolio risk thereby controlling volatility and provide for a finer focus on financial goals. Structured Products allow investors to have an individualistic view of the market and achieve desire results irrespective of whether the market is bullish or bearish in trend.

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[1] accredited type, defined as an individual or couple who have a net worth of at least $1 million, or an individual who had income in the previous year of at least $200,000, or a couple with at least $300,000 of income in the previous year

 

Structured Products

I was discussing about structured products and their usage patterns in India Vis-à-vis US markets, on a casual day with my friends. There came this idea of working on a white paper  briefing on the advantages of Structured products. But , thousands of dissertions has been made on those lines. So, better stay put in my profession. So, a  simple paper which discuss on how can a investment company can get benefit out of  structured products…………