Structured product

A structured product is a pre-packaged financial instrument made up of several other financial instruments, which are underlying assets (deposits, bonds, shares, futures, options, etc.). The revenue is not pre-defined and depends on changes of prices for underlying assets or credit events on these assets.

Structured products are offered by banks and financial institutions (brokers, managing companies). A structured product can be formalized as a deposit, trust management agreement, note (bond), certificate or warrant. Structured products issued in the form of securities can be traded on the exchange market and OTC market. Individuals and organizations can invest in structured products. Special terms for buying structured products in a particular country are regulated by local financial authorities. The entry threshold (minimum investment volume) for structured products can be different. It is relatively low for securities. For example, the minimum lot for the structured product described on the page Notenstein La Roche Privatbank, 0% 12mar2021, USD (2188D)> was $ 1 000. Structured deposits are usually designed for the premium-segment customers, therefore the minimum investment volume is $ 50 000.

All structured products involve some credit risk, or the risk that a seller of a structured product may fail to fulfill liabilities to the investor. The government usually doesn’t back up banks’ liabilities on structured products – unlike on deposits. Another embedded risk is the liquidity risk. Structured products are far less liquid than the shares of “blue chips”. Structured notes (certificates and warrants) have the lowest liquidity risk, since they can be sold on the stock exchange or in the OTC market; however the more complex the structured product is, the more difficult it is to sell it and the larger discount should be offered to the current price to realize them instantly. Other types of structured products cannot be sold before the due date, though the bank can include an option into the agreement allowing early redemption.

The simplest structured product can be as follows: the bank is obliged to return the invested funds to the investor on the due date of the structured product, and the investor gains income if the share of, for example, Apple will not be less than $ 100 during the term of the structured product. The offered income will be bigger than the income on deposits.