Although there are endless possibilities with Structured Products and their fancy features, good product design is as simple as would be better. Here are the 3 basic features that you need to know.
1. Underlying Assets
The performance of a Structured Product is dependent on its Underlying Assets, which are usually equities or indices. For example, clients looking to invest their pension money would go for Underlying Assets that are Country Indices like Nikkei, S&P, Dow Jones, Euro Stoxx, etc. Country Indices are on the ultra safe end of the spectrum because they are much less volatile. They are also less likely to stay down for extended periods of time.
There is a wide range of Underlying Assets the investor can choose from. For a client that loves anything to do with technology, their Structured Product will have Underlying Assets like Facebook, Apple, Netflix, Sony – basically a basket of tech sector equities. Let’s call this the FANS basket.
How well the Structured Product performs is dependent on the Underlying Assets. For most Structured Products, performance is tied to the worst performing Underlying Asset. Let’s say that in the FANS basket, Facebook has the poorest performance at 80% of “buy-in” price (no offense Mark, we’re sure you’re doing a great job!). This means that the Structured Product is performing at 80% as well.
2. Coupon Trigger
The Coupon Trigger determines whether the Coupons (think dividends) are paid. Coupons are paid out as long as the worst performing Underlying Asset is above Coupon Trigger.
For example, a 70% Coupon Trigger would mean that the Underlying Assets have room to fall until 70% of “buy-in” price, and Coupons will still be paid out.
Using the FANS basket, imagine if:
– Facebook: 80% – Apple: 92%
– Netflix: 84%
– Sony: 97%
The worst performing Underlying Asset is Facebook at 80%, which is still above the 70% Coupon Trigger – hence Coupons are paid out. Even if all the Underlying Assets have fallen below “buy-in” price (100%) like in this case here, the investor still receives his Coupon and makes a profit!
3. Protection Barrier
The concept behind the Protection Barrier is exactly the same as that behind the Coupon Trigger. This time, instead of looking at Coupons, the Protection Barrier protects the investor’s Capital.
At maturity, the full Capital is returned to the investor as long as the worst performing Underlying Asset is above Protection Barrier. Structured Products are popular in current markets because of this feature.
For example, a 60% Protection Barrier would mean that the Underlying Assets have room to fall until 60% of “buy-in” price, and the full Capital will still be returned at maturity. If it were a traditional investment into a fund, the investor would have lost the 40%.
These 3 features are the main ingredients of most Structured Products. Other features are “bonuses” that help to fine-tune the product to better suit an investor’s profile and preferences.
