29 Feb, 24

What are Structured Products?

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Zerocap

Zerocap

Structured products are intricate financial instruments offering personalized risk-return profiles to meet the diverse needs of investors. By fusing traditional securities like stocks and bonds with derivatives (e.g., options, swaps), these products have surged in popularity, as they cater to investors’ quest for innovative ways to reach their financial objectives​​.

Principles of Structured Products

Structured products are engineered to offer investors targeted investments based on their specific risk appetites, return requirements, and market forecasts. They can provide various benefits, including principal protection, tax-efficient access to taxable investments, enhanced returns, reduced volatility, and the potential for positive returns in low-yield or flat market conditions. However, they are also subject to risks like credit risk, lack of liquidity, complexity, and the potential for loss of principal due to market movements​​.

Components and Types

The essence of structured products lies in their underlying assets and derivative instruments, which shape their risk characteristics and payoff structures. Common types include equity-linked notes, reverse convertible bonds, structured investment products, credit-linked notes, and collateralized debt obligations, each offering different levels of risk and potential returns​​.

Market Impact and Evolution

Structured products have evolved significantly, gaining traction for their role in offering predictability and custom-tailored risk exposure, especially in volatile markets. They provide a mechanism for issuers to raise funding at submarket rates by issuing debt with attached options, thus appealing to a broad spectrum of investors, from retail to institutional​​.

Advantages and Disadvantages

The allure of structured products lies in their customization, flexibility, potential for enhanced returns, and access to a wide array of underlying assets. Yet, their complexity, the risks associated with understanding them, liquidity limitations, market and counterparty risks, and the potential costs due to premiums, underscore the importance of thorough assessment before investment​​​​.

Understanding Structured Products

To navigate the structured products landscape, it’s crucial to grasp key terms such as the barrier, strike price, maturity, rainbow note, and coupon. These terms help investors understand the risks and returns associated with different structured products and make informed decisions based on their investment goals and risk tolerance​​.

Conclusion

Structured products represent a unique blend of customization, risk management, and potential for enhanced returns, serving as a valuable tool for investors seeking to diversify their portfolios and achieve specific financial objectives. However, their complexity and associated risks necessitate a comprehensive understanding and careful consideration by potential investors.

FAQs

  1. What are structured products?
    • Structured products are financial instruments designed to offer customized risk-return profiles by combining traditional securities with derivatives.
  2. What are the benefits of structured products?
    • Benefits include customization, potential for enhanced returns, diversification, and access to a wide range of underlying assets.
  3. What are the risks associated with structured products?
    • Risks include complexity, liquidity limitations, market risk, counterparty risk, and the potential for losses due to market volatility.
  4. Can structured products offer principal protection?
    • Yes, some structured products offer principal protection, but this can vary based on the product’s structure and the level of risk involved.
  5. How can investors choose the right structured product?
    • Investors should identify their investment goals and risk tolerance, conduct thorough research on different products, and consult with financial professionals to find a structured product that matches their needs​​.

About Zerocap

Zerocap provides digital asset liquidity and digital asset custodial services to forward-thinking investors and institutions globally. For frictionless access to digital assets with industry-leading security, contact our team at [email protected] or visit our website www.zerocap.com

DISCLAIMER

This material is issued by Zerocap Pty Ltd (Zerocap), a Corporate Authorised Representative (CAR: 001289130) of AFSL 340799. Material covering regulated financial products is issued to you on the basis that you qualify as a “Wholesale Investor” for the purposes of Sections 761GA and 708(10) of the Corporations Act 2001 (Cth) (Sophisticated/Wholesale Client). This material is intended solely for the information of the particular person to whom it was provided by Zerocap and should not be relied upon by any other person. The information contained in this material is general in nature and does not constitute advice, take into account the financial objectives or situation of an investor; nor a recommendation to deal. Any recipients of this material acknowledge and agree that they must conduct and have conducted their own due diligence investigation and have not relied upon any representations of Zerocap, its officers, employees, representatives or associates. Zerocap has not independently verified the information contained in this material. Zerocap assumes no responsibility for updating any information, views or opinions contained in this material or for correcting any error or omission which may become apparent after the material has been issued. Zerocap does not give any warranty as to the accuracy, reliability or completeness of advice or information which is contained in this material. Except insofar as liability under any statute cannot be excluded, Zerocap and its officers, employees, representatives or associates do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. This is a private communication and was not intended for public circulation or publication or for the use of any third party. This material must not be distributed or released in the United States. It may only be provided to persons who are outside the United States and are not acting for the account or benefit of, “US Persons” in connection with transactions that would be “offshore transactions” (as such terms are defined in Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”)). This material does not, and is not intended to, constitute an offer or invitation in the United States, or in any other place or jurisdiction in which, or to any person to whom, it would not be lawful to make such an offer or invitation. If you are not the intended recipient of this material, please notify Zerocap immediately and destroy all copies of this material, whether held in electronic or printed form or otherwise.
 Disclosure of Interest: Zerocap, its officers, employees, representatives and associates within the meaning of Chapter 7 of the Corporations Act may receive commissions and management fees from transactions involving securities referred to in this material (which its representatives may directly share) and may from time to time hold interests in the assets referred to in this material.  Investors should consider this material as only a single factor in making their investment decision.

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