Structured products are a group of modern forms of investment, combining the security of capital with direct investments (foreign exchange, currency, real estate or funds).
Structured products can take different forms:
- Closed-end investment fund
- Bonds / Certificates
- Investment policies
- A derivative instrument
The common feature of most structured products is that they are:
- Dependence of investment performance on market factors
- Guarantee of return on all or part of the capital invested
- Cost and tax efficiency solution
What is a structured product?
Structured products offering a guarantee of a return on all or part of the capital invested consist of three components:
- Deposit (fixed income investment)
- An option (derivative instrument or another instrument that allows the performance of the investment to be linked to market factors)
- Commissions of a financial institution
Most structured products offer a guarantee of a return on all or part of the capital invested.
Where does it come from?
In fact, when a structured product is created, most of the funds deposited by the investor are placed in a secure deposit. The nominal value of the deposit is selected in such a way that the interest earned on the maturity date of the investment enables the return of the guaranteed amount.
Where do profits from structured products come from?
In the process of creating a structured product, the amount at the disposal of the product manufacturer after deposit is spent on an instrument that yields income from changes in market factors. In practice, in most cases, such an instrument is the option.
The option is a derivative instrument resembling an insurance contract. The option buyer pays a certain value (so-called premium) for the right to receive remuneration for a specific benefit.
When creating a structured product, the product manufacturer acquires an option, so he buys the option by paying a premium. As a result of the option settlement, at its maturity date (equal to the maturity of the investment), the option buyer receives a payment, which is transferred in full to the structured instrument holder. The result of such settlement shall not be negative. In the worst case scenario it can be equal to 0.
How does the maker of a structured product earn money?
The remuneration of the product manufacturer shall be the difference between the value of the funds paid and
deposit expenses and options.
Different creators have different mark-up policies, but are subject to the same restrictions:
The value of the deposit is in practice determined by the market level of interest rates.
It should be assumed that the higher the interest rate level at the deposit date, the smaller the amount of the deposit should be used for it.
The less money is spent on an option, the less likely it is to receive a high payout for settling such an option.
The value of the option purchased by the product manufacturer is not known to buyers of structured products. In practice, in setting the margin, manufacturers of structured products always have to choose between the short-term profits of their own institution (resulting from high commissions) and the satisfaction of purchasers (higher spending on the option guarantees higher profits for customers).
Investing in structured products: