Components of structured products
Structured products are investment instruments that combine multiple financial components to create a customised investment solution. The key components of structured products typically include:
Underlying Asset: This can be a single asset or a basket of assets such as stocks, indices, commodities, or currencies. The performance of the structured product is often linked to this underlying asset.
Payoff Structure: The payoff of a structured product defines how returns will be calculated based on the performance of the underlying asset. This can include various structures such as fixed coupons, caps, or participation rates.
Derivatives: Many structured products incorporate derivatives like options, swaps, or forwards. These derivatives are used to achieve the desired risk-return profile and to hedge against potential losses.
Tenor (Maturity): This refers to the duration of the investment period for the structured product. The tenor can vary from short-term to long-term, affecting the risks and returns associated with the product.
Market Conditions and Terms: Structured products may have specific terms that are contingent on market conditions. Features such as knock-in or knock-out levels can significantly influence the potential payout.
Credit Risk: The issuer's creditworthiness is a crucial component, as structured products often expose investors to the risk of default. Investors need to assess the financial health of the issuing institution.
Liquidity: The liquidity of structured products can vary, impacting how easily an investor can exit the investment before maturity. Some products may have secondary markets, while others may not be easily tradable.
Costs and Fees: Investors should consider various costs associated with structured products, including management fees, transaction costs, and any hidden fees that may impact returns.
Understanding these components is essential for evaluating structured products and determining if they align with an investor's financial goals and risk tolerance.