Types of Product
Structured products – are you ready?
Been following the developments in the financial markets for quite some time now? Already gained some experience in trading stocks or investment funds? Annoyed by the fact that you’ve only been able to profit from rising prices but lose money when the market goes down?
Welcome to the world of structured products!
We’ll introduce you to products that can help you to earn attractive returns regardless of whether the markets are going up, down, or simply marching in place. You’ll learn which product types make sense in which market phases and what the associated risks are.
A breathtaking product panorama
The growth in the number and variety of investment products has persisted for years now. Innovative products make it possible for you, as an investor, to benefit from practically any price move in a specific underlying instrument, be it a stock, index, currency or commodity (whereby fixed-income securities or investment funds can also serve as underlying instruments).
The main types of structured products:
- Capital Guaranteed Products
Capital Protection Products are suitable for risk-averse investors. At maturity the investor receives a minimum redemption equivalent to the capital protection level. Additionally, the investor may participate in the positive performance of the underlying.
Capital Protection Products offer protection of the nominal value (100%) at maturity, subject to credit risk (i.e. if the issuer of the product goes bankrupt, you won’t get your capital back). In addition, they offer a return potential linked to the development of an underlying, in the form of participation, a recurring payment, or a one-off payment at expiration. Capital Protection Products are suitable for risk-averse investors. These products can be structured to perform in rising or falling markets and should be chosen in accordance with market expectations over the lifetime of the product.
Example of such product types: Capital Protection with participation, Convertible certificates, barrier capital protection, capital protection with coupon.
| Issuer: BBB- min |
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Currency: USD |
| Product Note on TOP 40 Index |
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Capital Protection: 100% |
| Underlying: TOP40 Index |
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Participation in the Index: 100% |
| Maturity: 5 Years |
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Characteristics:
Suitable for investors who have a bullish vision on the African market
The product offers a capital protection of 100%
Long volatility product
Risk
Possibility of loss in capital in case of default by the issuer
Possibility of gaining less than the risk free rate.
- Yield Enhancement Products
Yield Enhancement Products are suitable for investors with a moderate to increased risk appetite who expect the underlying to move sideways or in a trading range. Return potential is limited, with the risk involved being smaller than a direct investment in the underlying.
Yield Enhancement Products offer a limited (capped) upside, usually in the form of a fixed coupon (or a discount). Investors forgo an unlimited participation in favor of a recurring or one-off payment. Yield Enhancement Products may offer a conditional capital protection, in which case the protection is granted only if a predefined “condition” is met (i.e. a barrier has not been touched). These products are suitable for investors with a moderate to increased risk appetite and the expectation of markets moving sideways over the lifetime of the product.
Example of such product types: Barrier Reverse Convertibles, Discount Certificates, Barrier Discount Certificate, Express Certificate.
| Issuer Rating: BBB+ |
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Underlying: S&P Pan Africa Index |
| Format: Note |
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Product: Barrier Reverse Convertible Note |
| Maturity: 1year |
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Currency: USD |
| Barrier: 70% |
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Coupon: 7.50% p.a |
Characteristics:
Suitable for short-term investors
Possibility of earning the coupon, even if the underlying decreases by 30%.
Coupon of more than risk-free rate
Risk
Possibility of loss in capital, if the issuer defaults.
Possibility of loss in capital if the underlying loses more than 30% at any time during the life of the product.
Possibility of gaining less than the risk free rate
- Participation
Participation Products are suitable for investors with a moderate to increased risk appetite who want unlimited participation in the performance of the underlying. The risk corresponds to the risk of a direct investment in the underlying. Participation Products offer usually unleveraged participation in the performance of one or multiple underlyings. Participation Products may offer a conditional capital protection, in which case the protection is granted only if a predefined “condition” is met (i.e. a barrier has not been touched). Participation Products are subject to credit risk. These products are suitable for investors with a moderate to increased risk appetite. Market expectation should be a directional move (up or down) over the lifetime of the product.
Example of such product types: Tracker Certificate, Outperformance certificates, Bonus certificates, Twin Win certificate
| Product: Twin Win |
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Issuer: A- |
| Currency: USD |
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Underlying: MSCI South Africa Index |
| Maturity: 3 Years |
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Barrier of Protection: 75% |
Payoff:
- At Maturity: If the underlying is higher than its initial level, the investor receives 100% of his capital + 100% of the underlying’s performance capped at 50%
- If the underlying is lower than its initial level, but higher than barrier of protection, the investor receives 100% of his capital + 100% of the underlying’s absolute performance.
- If the underlying is lower than barrier of protection, the investor receives, amount invested x negative performance.
Characteristics:
The structure offers full exposure to the underlying, up/down to the barrier.
The protection barrier of 75% limits to a certain extent the loss in capital.
Risk
Possibility of loss in capital, if the issuer defaults.
Possibility of loss in capital if the underlying is less than the protection barrier at maturity.
Possibility of gaining less than the risk free rate.
- Leveraged Products
Leverage Products provide the opportunity to generate leveraged profits while making a relatively small initial investment. The risk of Leverage Products, however, is a total loss of the initial investment. Leverage Products are therefore only suitable for investors with a high risk appetite.
Leverage Products can also be used to hedge risks, in which case they reduce the risk of a portfolio. Market expectation should be a strong up- or downwards move, and products are best used as short term speculative investments requiring daily supervision or as a hedge
Example of such product types: Call Warrants, Put Warrants, Knock-out-Warrants, Mini Futures
| Product: Put 20% OTM JALSH |
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Price: 0.80% |
| Currency: USD |
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Underlying: JALSH Index |
| Strike: 2475 |
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Maturity: 6 months |
Characteristics:
Leveraged return on invested capital for a negatively performing underlying.
Limited potential loss to the capital invested
Risk
Possibility to lose the premium.
Possibility of gaining less than the risk free rate.
Possibility of loss in capital, if the issuer defaults.
