Understanding structured products
Structured products boast many advantages, including strong convictions, sometimes offering capital protection, providing an alternative to investment funds in euros and making asset classes reserved for professionals accessible to all.
Structured products are financial instruments whose main feature is their capacity to generate returns over a given time period while offering full or partial capital protection.
Their risk and return depend on the level of protection, their underlying assets and their maturity date.
There are two main types of structured products – return-based products and index-linked products.
The main advantages
The main advantages of structured products are inherent to their nature.
The return on a structured product is determined by a mathematical formula set on its issue which is applied on maturity or at regular intervals.
Therefore, investors know the return they can hope to achieve regardless of market conditions. There are no management risks and all or part of the initial investment may be protected.
Structured products may also provide access to assets such as oil, metals and corporate bonds that are generally only available to professional investors.
Depending on market conditions, they can offer attractive returns in bear markets or in times of high volatility.
The main risks
Like all financial products, structured products incur a number of risks, including credit risk if the issuer or guarantor becomes insolvent and fails to reimburse their debt, and liquidity risk which can arise when selling the product before its term on an illiquid market.
Investors also incur interest rate risk on future interest rate fluctuations.
Market risk affecting the underlying assets must also be taken into account, as well as exchange rate risk if the product is issued in a foreign currency and the risk of capital loss if the product does not offer full protection.
December 16, 2019