Introduction to structured products - Discover the best cheatsheet

Definition of a structured product

Structured products are investments which provide a return based on the performance of an asset. This asset can cover the equity, index, fund, interest rate, currency, commodity or property markets. The payoff and level of capital at risk can be pre-defined. Payoff profiles can be designed to take advantage of rising, falling or range bound markets, and delivered in a way that can be tailored to the needs of investors.They are designed for investors who are prepared to invest for a fixed period, and who also want some degree of protection over their initial capital.


Types of structured products

Product group: Yield enhancement
Product type: Market-linked growth or income
Direction of trade: Sideways

This is a market-linked growth or income product, that pays out a coupon based on the number of days in which the underlying asset’s price has remained within a predetermined corridor (if combined with a range feature) or at or above a predefined barrier of its initial strike. The accumulated coupons can be paid out periodically or as a one-off return at maturity, providing an above-market rate.

Pros

  1. Chance to accumulate return thanks to multiple observations
  2. Can be used with a spectrum of boundaries to cover many market eventualities in a combination with a range feature
  3. May be used successfully in a low interest rate environment

Cons

  1. Provides no return when market conditions don’t match predictions.
Accumulator

Product group: Leverage
Product type: Market-linked growth
Direction of trade: Bull, bear

This is a market-linked growth product that allows the investor the opportunity to acquire the underlying asset at a discount to its prevailing spot price. The product features a knockout so it can be redeemed early as soon as the underlying reaches a predefined trigger level. If the accumulator lives until maturity and the underlying closes below the strike price, the embedded gearing allows the investor to acquire more than one unit of the asset, depending on the predefined leverage.

Pros

  1. Underlying can be bought at a discount to the initial spot price
  2. Acquisition of more than one unit of the underlying asset when gearing is triggered

Cons

  1. Capital at risk
A performance chart of an autocallable structured product

Product group: Capital protection, yield enhancement
Product type: Market-linked growth or income
Direction of trade: Bull

This is a market-linked growth or income product that will expire pre-maturely as soon as the underlying asset reaches or breaches a certain level of its initial fixing on any of the pre-defined observation dates. Once the product is autocalled (has kicked out), investors receive at least their initial capital and potentially a return, depending on product terms. If the product expires naturally, the final rebate depends on the underlying’s performance at maturity or throughout the investment period. Autocall products are suitable for investors with a moderate risk appetite and a flexible investment horizon.

Pros

  1. Higher annualised return when product is autocalled
  2. Higher return as long as the underlying increases moderately

Cons

  1. Lower return than a direct investment in the underlying in bullish markets
A performance chart of a barrier reverse convertible payoff

Product group: Yield enhancement
Product type: Market-linked growth or income
Direction of trade: Sideways

This is a market-linked growth or income product that pays a coupon at maturity or as part of an income stream and returns the full initial investment if over the investment period or at maturity the underlying asset is at or above a predetermined barrier of its initial fixing. A barrier breach turns the barrier reverse convertible into a reverse convertible so the final payout becomes conditional upon the underlying closing above its strike price. The coupon can be dependent upon the performance of the underlying or unconditional. Barrier reverse convertibles are suited for investors who have a maximum return outlook and sideways market expectations.

Pros

  1. Chance for full notional return in case of stable and rising markets
  2. Additional level of notional protection in moderately falling markets

Cons

  1. Capital at risk
  2. Capped potential profit
CPPI

Product group: Participation
Product type: Market-linked growth
Direction of trade: Bull

This is a fund-based market-linked growth product that offers investors exposure to the rise of an underlying asset. Capital is allocated according in fixed proportions between risky assets, usually equity, and risk-free assets – bonds and/or cash – so as to take advantage of rising markets and ensure soft capital protection when prices fall. This product is suitable for investors who look for controlled volatility of their investment, but still want to participate in rising markets.

Pros

  1. Soft notional protection
  2. Protection on the downside of the market
  3. CPPI investments mimic direct investment in the underlying asset in rising markets
  4. Rapid de-risking through funds allocation in cash and bonds during market sell-off

Cons

  1. Capital at risk
  2. Missing out on immediate participation in upside markets while funds are allocated from risk-free to riskier assets
  3. Locks in losses due to smaller participation in a potential post-crisis rally

Product group: Capital protection
Product type: Market-linked growth or income
Direction of trade: Sideways to bull

This is a market-linked growth or income product which can be redeemed by the issuer (callable) or by the investor (puttable) at face value at pre-specified date(s) prior to the maturity. Callable (puttable) notes thus offer a higher (lower) coupon rate than a comparable note without a callable (puttable) feature to offset the issuer’s (investor’s) flexibility to terminate the product early. Callable notes are suitable for investors who wish to receive a higher interest payment than the prevailing market return, while puttable notes are preferred by investors who want flexibility.

Pros

  1. Higher return than the prevailing market rate for callable notes
  2. Early redemption at a higher re-investment rate for puttable notes

Cons

  1. Lower return than the prevailing market rate for puttable notes
  2. Early redemption at a lower re-investment rate for callable notes
Capital Protection with Knock-Out

Product group: Capital protection, participation
Product type: Market-linked growth
Direction of trade: Bull, bear

This is a market-linked growth product that offers 100% capital protection and participation in the underlying asset’s rise, as long as the underlying doesn’t breach a pre-defined barrier set above its initial level. If a barrier breach occurs, investors receive 100% of their initial investment plus a rebate, if any.

Pros

  1. Capital protection
  2. Minimising risk while keeping exposure to the underlying asset’s performance

Cons

  1. Limited upside potential due to capped return
Capped Participation

Product group: Capital protection, participation
Product type: Market-linked growth
Direction of trade: Bull, bear

This is a market-linked growth product which offers participation in the rise (call) or in the absolute value of the fall (put) of an underlying asset, up to a predefined cap (maximum return). Capped growth products are suitable for risk-averse investors who expect the underlying asset to rise (bull) or fall (bear), but not by more than the predetermined cap, and do not need their investment to generate regular income.

Pros

  1. Capital protection

Cons

  1. Limited upside potential
  2. Lower return than if holding the underlying if it outperforms
Cliquet

Product group: Participation
Product type: Market-linked growth
Direction of trade: Bull

This is a market-linked growth product which pays out a sum of periodically derived coupons corresponding to the rise of the underlying asset over the pre-determined time windows, capped and floored at pre-specified levels. This product is suitable for passive investors who expect a moderate rise in market volatility as it allows them to lock in a minimum profit after every sub-period of the product’s lifespan.

Pros

  1. Higher participation compared to capped growth

Cons

  1. Capital at risk
  2. If built on a basket, the worst performing underlying would limit the return potential

Product group: Yield enhancement
Product type: Market-linked growth or income
Direction of trade: Non-directional

This is a market-linked growth or income product whose return is linked to the creditworthiness of both the issuer and a reference entity. The product provides a one-time coupon payment at maturity or a fixed income stream throughout the investment period plus the repayment of the initial capital provided that no credit event (insolvency, default on payment, restructuring, etc.) has occurred in the reference entity. Otherwise, investors are exposed to the risk of total capital loss. Credit-linked notes are suitable for investors who expect a rising underlying market and have a maximum return outlook.

Pros

  1. Higher interest than the prevailing market rate

Cons

  1. Capital at risk
  2. Double credit default risk (through the issuer and the reference entity)
A performance chart of a structured products with digital payoff

Product group: Capital protection
Product type: Market-linked growth or income
Direction of trade: Bull, bear

This is a market-linked growth or income product which pays out a fixed coupon if the underlying asset reaches or breaches a pre-specified barrier, and no coupon otherwise. Digital products are suitable for investors who have a maximum return outlook conditional upon the behaviour of the underlying asset.

Pros

  1. Minimum return guaranteed at maturity or during the lifetime of the product

Cons

  1. Predefined maximum return
Dual Currency

Product group: Yield enhancement
Product type: Market-linked growth or income
Direction of trade: Bull, bear
This is a market-linked growth or income product whose return depends on the performance of a currency pair. The initial investment and the income, if any, are denominated in the base currency, while the capital at maturity plus any remaining income will be repaid in whichever currency has weakened against the other on the final observation date. Dual currency products are suitable for investors who have a strong bullish or bearish view about a given currency pair.

Pros

  1. Upside potential when strengthening base currency
  2. Higher return due to usually shorter tenor

Cons

  1. Capital at risk
  2. Potentially significant losses because of the currency conversion at a predetermined exchange rate
Floater

Product group: Capital protection
Product type: Market-linked income
Direction of trade: Sideways to bull

This is a market-linked income product that pays a coupon equal to the sum of a fixed rate and a reference rate, and capped and/or floored at pre-determined levels. Due to its similarity to a regular deposit, the floater is considered structured if it features a callable feature for the issuer or a puttable feature for the investor.

Pros

  1. Capital protection
  2. Income payment, potentially above the prevailing reference rate
  3. Minimum return even when the reference rate is falling

Cons

  1. Limited income potential through capped coupon amount
Leveraged Upside

Product group: Capital protection, participation
Product type: Market-linked growth
Direction of trade: Bull, bear

This is a market-linked growth product that offers geared participation in the appreciation of the underlying asset, uncapped or capped at a predetermined level. The product might offer a level of capital protection in moderately falling markets up to a predefined barrier/buffer. Once the barrier/buffer is breached, investors participate in the negative performance of the underlying.

Pros

  1. Geared participation in the upside potential of the underlying asset
  2. Uncapped return depending on product terms
  3. Limited capital protection in moderately falling markets

Cons

  1. Capital at risk
  2. Capped return depending on product terms
Range

Product group: Capital protection, yield enhancement
Product type: Market-linked growth or income
Direction of trade: Sideways

This is a market-linked growth or income product which pays out a one-time coupon at maturity or provides an income stream throughout the investment period provided that the underlying asset’s price has remained in a predetermined range during the observation window(s). This product is suitable for investors who expect low market volatility and is often paired with an accrual feature which secures a coupon accumulated over the number of days the underlying asset stays in the range.

Pros

  1. Can be used with a spectrum of boundaries to cover many market eventualities

Cons

  1. Provides no return when market conditions don’t match predictions.
Reverse Convertible

Product group: Yield enhancement
Product type: Market-linked growth or income
Direction of trade: Sideways

This is a market-linked growth or income product that pays a coupon at maturity or as part of an income stream and returns the full initial investment if the underlying asset closes at or above its initial fixing at maturity, or provides downside participation in the fall of the underlying otherwise. The coupon can be dependent upon the performance of the underlying or unconditional. Reverse convertibles are suited for investors who have a maximum return outlook and sideways market expectations.

Pros

  1. Chance of full notional return in case of stable and rising markets

Cons

  1. Capital at risk
  2. Capped potential profit
  3. Income can be conditional upon underlying asset’s performance
Spread

Product group: Capital protection, participation
Product type: Market-linked growth or income
Direction of trade: Bull, bear

This is a market-linked growth or income product with both limited upside potential and downside risk. The spread is usually associated with going long and short on a call or put option on long- and short-term interest rates, thus tracking the widening of the yield curve. A flat yield curve over longer time periods would then lead to only a small or no return.

Pros

  1. Getting a return from shorting one of the underlyings and anticipating its further decrease; not possible in the equity market

Cons

  1. Limits the potential profit to a predefined range
  2. Risk of no return for prolonged periods if the interest rate curve stays flat
Twin-Win

Product group: Capital protection, participation
Product type: Market-linked growth
Direction of trade: Bull, bear

This is a market-linked growth product that offers capped or uncapped participation in the upside of the underlying asset and limited participation in its absolute price drop up to a predetermined barrier, provided that throughout the lifespan of the product the underlying asset never reaches or breached the barrier. Breaching the barrier condition at any time during the investment period will turn the twin-win certificate into a tracker which will potentially put the entire invested capital at risk. Twin-win certificates are suitable for investors who have a bullish market outlook, but also allow for a moderate drop in their investing expectations.

Pros

  1. Unlimited participation in the rise of the underlying asset
  2. Can also offer a leveraged participation in the upside and an additional coupon
  3. Positive return in moderately falling markets

Cons

  1. Performance mimics direct investment in the underlying when barrier is breached
Uncapped Participation

Product group: Capital protection, participation
Product type: Market-linked growth
Direction of trade: Bull, bear

This is a market-linked growth product which offers unlimited participation in the rise (call) or in the absolute value of the fall (put) of an underlying asset. Uncapped growth products are suitable for risk-averse investors who wish to participate fully in rising (bull) or falling (bear) markets and do not need their investment to generate regular income.

Pros

  1. Capital protection
  2. Unlimited upside potential

Cons

  1. Potentially lower return than a direct investment in the underlying in bullish markets
Wedding Cake

Product group: Capital protection, yield enhancement
Product type: Market-linked growth or income
Direction of trade: Non-directional

This is a market-linked growth or income product that pays a variable coupon dependent upon the price of an underlying asset moving within pre-specified ranges. Usually, the wider the range of the underlying’s price movement, i.e. the higher the prevailing market volatility, the lower the return. If the underlying’s price reaches any of the farthest barriers, the product will not pay a coupon but will return the initial investment.

Pros

  1. Higher return over-performing the underlying in flatter markets

Cons

  1. Lower return as soon as any of the barriers is breached, even in rising markets
  2. Capital is protected only if the product is held until maturity

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