What is a Structured Product

Structured products are complex investment products consisting of a combination of investment instruments such as options and bonds. In general, options are used to bond yields and to keep the initial capital intact. And the rate of return, is determined by the underlying values which range from equities, indices, commodities to foreign currency.

A structured product with capital protection acts as a bond investment, where at the end of term it recovers the nominal value. Structured products with capital protection comprise of a bond and an option, and some of the invested money is placed in a zero coupon bond to repay the nominal amount on the expiration date.

The remainder is placed in an option that establishes exposure to the selected asset class such as a specific market, a selected industry or various kinds of assets. The price of the option and the amount of money invested in the bond determines how many options are to be purchased. While the number of options determines the degree of participation.

Participation rates indicate the percentage resulting from the underlying asset’s development. And the participation rate may be increased by paying the premium.

The variation between the way notes (structured products) are compiled and the choice of underlying values is enormous. Unlike mutual funds, notes have a fixed term of usually between four and seven years.

The development of underlying values largely determines the yield, depending on the type of note, or period. The original relationship between risk and return on a share or index can be changed by the composition of the structured products.

The investor can be without a corresponding return on options or bond yield upon the structured product only to repay the nominal amount. A structured product with capital protection will refund only the nominal amount of the underlying asset if it does not thrive, and the investor stands to lose fees such as brokerage fees and any paid premiums.

Typically, the issuer is the bank / institution that has made the product, and it has to repay the principal amount and any interest after maturity. The look back notes, are based on the lookback option, and the structure of such an option entails a fixed period that is taken into account on the grounds of the price of the underlying shares or indices.

This structure is attractive when the underlying stock or index falls after the maturity of the notes has been initiated, and the timing of the purchase is insignificant. The risks connected to various structured products is identical to those risks involved with options.