Structured products, also known as financial products, are a combination of several instruments. These are necessary to provide investors with a return profile. They can be used either as an investment product or as a hedge. Their functioning is therefore complex. To help you see more clearly, this article provides you with all the information you need to know on the subject.
How exactly does a structured product work?
In order to understand how structured products work, it is first of all necessary to know their characteristics. In general, a structured product has a maturity date. In other words, it is subject to a lifetime. This is fixed and non-negotiable. It varies from 1 to 10 years. This is capital protection. It can be total or partial. As regards their composition, the formulas that make up structured products vary from one project to another. There is therefore no standard combination. However, they are always made up of two parts. These are capital protection and the search for performance. The aim is to implement an efficient and attractive investment strategy. In most cases, the second composition represents a share or a stock market index.
More concretely, the performance of a financial product is defined according to an entirely technical formula. If an individual wishes to achieve a market scenario, it is essential that he or she anticipates a performance higher than the risk-free rate. This can be paid out in various forms. It can either be paid as a redemption premium or periodic coupons. If the life of the product comes to an end and the scenario has not worked, the investor will receive all his capital. However, if the reference market has fallen by more than the set limit, the investor will not be able to receive the full capital. He will then suffer a loss based on the current fluctuations.
Structured products: Who are they for?
In general, a structured product guarantees a beneficial financial investment. If it is well constructed, such a product is an indispensable financial instrument for an investor. It is a more secure means of investment. However, in order to avoid any risks, it is necessary to choose carefully in which structured product to invest. If the wrong choice is made, it is possible that the product does not meet investors’ expectations. In order to make no mistakes, the latter must ensure that the financial product to which they will subscribe fully meets their risk profile. In concrete terms, therefore, financial products are aimed at all investors who wish to gain exposure to a market scenario while at the same time enjoying capital protection. Treasurer, foundation, asset holding company… any investor profile can find its account. Some use financial products as an alternative to various investments. Others use it as a protection tool in case the scenario does not materialize.
The advantages of structured products
Given the way financial products work, they certainly offer many advantages. Indeed, this type of product inherits a high degree of transparency. One reason for this is the fact that it is imposed by regulation. The latter allows the interested party to judge its risk and to know reliably the potential return expected. By calling on the expertise of an advisor, you will be aware of all possible scenarios. You will then be able to make a concise decision while taking into account the uncertainties you will have to face. Structured products also offer a wide range of underlyings. In other words, they allow investors to manage a particularly diversified portfolio. Thanks to the variety of possible asset classes, he can choose between stock market indices, major funds or baskets of values. Furthermore, structured products can be adapted to any strategy. This depends entirely on the needs and requirements of investors. So despite the possible risks you may face, you can still use your own product. The only downside is that the prices are higher than those of a standard structured product.
Structured product risks
Structured investments present many risks. These risks are mainly related to the investment medium. In general, structured products are subject to three risks. The first risk is credit risk. This refers to a possible insolvency of the guarantor. This situation will result in a loss of the amount underwritten. It may be total or partial. The market risk is due to the fact that the underlying assets may fluctuate at any time. These will result in a total loss of the amount invested. As for liquidity risk, it is possible that certain market conditions may have a negative impact on investment vehicles. In some cases, they may even lead to illiquidity. Resale then becomes impossible. There are, however, certain products that are subject to less risk, including the H range products.