What is a Structured Product?
What is a Structured Product?
An educational definition by our expert Yaël Eljarrat-Ouakni, Head of Structured Products offerings at Societe Generale Private Banking France (French only).What is a Structured Product?
In theory, a financial product is said to be "structured" when it is composed of at least two financial assets. These assets can be shares, bonds, options, etc. In practice, a structured product is a financial instrument issued by a bank that offers the possibility of obtaining a return / gain, depending on the achievement of a predetermined market scenario. It can be a tool for portfolio diversification and an alternative to traditional financial investments.
What are the steps involved in creating a Structured Product?
The creation of a structured product goes through several steps:
1/ First, the risk/return trade-off needs to be determined based on the investors' objectives and constraints
2/ Then comes the choice of the "underlying", which will be the product's reference asset. This can be a stock (or a basket of stocks), a stock index, a fund, a commodity, etc.
3/ The investment horizon is then set. Structured products can have maturities ranging from 6 months to 12 years.
4/ Then, the level of capital protection is established. Indeed, the invested capital can be totally, partially or not at all protected.
5/ Finally, the "payment formula" is defined. It depends on the reference asset and will determine in which market scenarios a return will be paid or not (some formulas allowing to offer a return in case of bull market, but also in case of stable or bear market). This formula is set at the launch of the product.
What are the different types of Structured Products?
There are several types of structured products, which, according to us, can be classified into two main families: "Yield" products and "Directional" products.
♦ "Yield" products
Yield products are intended to provide a return, also known as a "Bonus" or "Coupon". "Bonus" or "Coupon". This can be fixed or variable. It can be guaranteed or conditional on the realisation of a market scenario, which will depend on the performance of the underlying. It is paid out on predetermined dates at the time the product is created (which may be monthly, quarterly annual, etc.)(1)
♦ "Directional" products
Directional products are those products that aim to to offer "participation" / "indexation" of the performance of an underlying asset. The investor can thus profit from the rise or fall of an asset. This participation is usually paid out at the maturity of the product.(2)
What about capital protection?
As with any financial investment, structured products carry a risk of capital loss. There are three product profiles for protection capital :
1/ Products the capital of which is guaranteed at maturity: these products guarantee the investor at least the full amount of thecapital capital initially invested, provided that the product is carried to maturity.(3)
2/ Products with capital protection, also known as "barrier" products: they allow the investor to benefit from a protection of the capital initially invested(4) as long the underlying asset has not crossed a threshold, also known as a "barrier", which is determined in advance. - which has been determined in advance. If the barrier is breached the investor suffers a capital loss.
3/ Products without protection: These do not offer protection to the investor in the event of an opposite development of the underlying compared to the anticipated scenario.
Regardless of the type of product protection, its lifetime valuation may fluctuate, depending on day-to-day market parameters. Thus, in the event of resale of the product before its deadline, the investor may suffer a capital loss which may be partial or even total.
What are the benefits and risks associated with Structured Products?
♦ Benefits
- Structured products can allow a tailor-made approach and help optimize the risk / return ratio. Indeed, it is possible to modulate the product parameters so as to find the right balance between desired return and level of risk accepted by the investor, while taking into account market parameters.
- It is a tool that can facilitate diversification and make it possible to invest in assets that are sometimes not very accessible through traditional instruments.
- Finally, structured products offer, under normal market conditions, daily liquidity provided by the issuer.
♦ Risks
On the other hand, structured products involve certain risks. The main one being the risk of capital loss (which can be partial or total, during the life or at maturity of the product):
- First of all, in the event of the issuer's insolvency (the so-called issuer credit risk), there is a risk that the issuer will not be able to meet its obligations) including for capital guaranteed products.
- In the event that the anticipated scenario does not occur (e.g. for barrier products, if the barrier products, if the underlying closes below the barrier at maturity).
- Finally, if the product is sold by the investor before maturity by the investor, the resale price depends on the market parameters of the day. Thus, the e amount reimbursed may be less than the amount subscribed(5). Changes in certain underlyings can also significantly amplify changes in the valuation of structured products.
There is also a potential opportunity cost for the client the client: if the anticipated scenario does not occur (e.g. no coupon payment) or if the scenario does materialise but the coupon paid is lower than the return the investor would have received had he invested directly in the invested directly in the underlying.
(1) Provided that the anticipated market scenario realized
(2) Provided that the anticipated market scenario realized
(3) Excluding fees and taxes applicable to the investment framework
(4) Excluding fees and taxes applicable to the investment framework
(5) Excluding fees and taxes applicable to the investment framewor
Full Script:
What is a Structured Product?
In theory, a financial product is said to be "structured" when it is composed of at least two financial assets. These assets can be shares, bonds, options, etc. In practice, a structured product is a financial instrument issued by a bank that offers the possibility of obtaining a return / gain, depending on the achievement of a predetermined market scenario. It can be a tool for portfolio diversification and an alternative to traditional financial investments.
What are the steps involved in creating a Structured Product?
The creation of a structured product goes through several steps:
1/ First, the risk/return trade-off needs to be determined based on the investors' objectives and constraints
2/ Then comes the choice of the "underlying", which will be the product's reference asset. This can be a stock (or a basket of stocks), a stock index, a fund, a commodity, etc.
3/ The investment horizon is then set. Structured products can have maturities ranging from 6 months to 12 years.
4/ Then, the level of capital protection is established. Indeed, the invested capital can be totally, partially or not at all protected.
5/ Finally, the "payment formula" is defined. It depends on the reference asset and will determine in which market scenarios a return will be paid or not (some formulas allowing to offer a return in case of bull market, but also in case of stable or bear market). This formula is set at the launch of the product.
What are the different types of Structured Products?
There are several types of structured products, which, according to us, can be classified into two main families: "Yield" products and "Directional" products.
♦ "Yield" products
Yield products are intended to provide a return, also known as a "Bonus" or "Coupon". "Bonus" or "Coupon". This can be fixed or variable. It can be guaranteed or conditional on the realisation of a market scenario, which will depend on the performance of the underlying. It is paid out on predetermined dates at the time the product is created (which may be monthly, quarterly annual, etc.)(1)
♦ "Directional" products
Directional products are those products that aim to to offer "participation" / "indexation" of the performance of an underlying asset. The investor can thus profit from the rise or fall of an asset. This participation is usually paid out at the maturity of the product.(2)
What about capital protection?
As with any financial investment, structured products carry a risk of capital loss. There are three product profiles for protection capital :
1/ Products the capital of which is guaranteed at maturity: these products guarantee the investor at least the full amount of thecapital capital initially invested, provided that the product is carried to maturity.(3)
2/ Products with capital protection, also known as "barrier" products: they allow the investor to benefit from a protection of the capital initially invested(4) as long the underlying asset has not crossed a threshold, also known as a "barrier", which is determined in advance. - which has been determined in advance. If the barrier is breached the investor suffers a capital loss.
3/ Products without protection: These do not offer protection to the investor in the event of an opposite development of the underlying compared to the anticipated scenario.
Regardless of the type of product protection, its lifetime valuation may fluctuate, depending on day-to-day market parameters. Thus, in the event of resale of the product before its deadline, the investor may suffer a capital loss which may be partial or even total.
What are the benefits and risks associated with Structured Products?
♦ Benefits
- Structured products can allow a tailor-made approach and help optimize the risk / return ratio. Indeed, it is possible to modulate the product parameters so as to find the right balance between desired return and level of risk accepted by the investor, while taking into account market parameters.
- It is a tool that can facilitate diversification and make it possible to invest in assets that are sometimes not very accessible through traditional instruments.
- Finally, structured products offer, under normal market conditions, daily liquidity provided by the issuer.
♦ Risks
On the other hand, structured products involve certain risks. The main one being the risk of capital loss (which can be partial or total, during the life or at maturity of the product):
- First of all, in the event of the issuer's insolvency (the so-called issuer credit risk), there is a risk that the issuer will not be able to meet its obligations) including for capital guaranteed products.
- In the event that the anticipated scenario does not occur (e.g. for barrier products, if the barrier products, if the underlying closes below the barrier at maturity).
- Finally, if the product is sold by the investor before maturity by the investor, the resale price depends on the market parameters of the day. Thus, the e amount reimbursed may be less than the amount subscribed(5). Changes in certain underlyings can also significantly amplify changes in the valuation of structured products.
There is also a potential opportunity cost for the client the client: if the anticipated scenario does not occur (e.g. no coupon payment) or if the scenario does materialise but the coupon paid is lower than the return the investor would have received had he invested directly in the invested directly in the underlying.
(1) Provided that the anticipated market scenario realized
(2) Provided that the anticipated market scenario realized
(3) Excluding fees and taxes applicable to the investment framework
(4) Excluding fees and taxes applicable to the investment framework
(5) Excluding fees and taxes applicable to the investment framework
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