Glossary

While this method of building a structured product has advantages for smaller entities (such as the fact that there is minimal administration required during the life of the product), larger product providers usually prefer to build such products using a combination of rolling short-term money market deposits and an equity-linked swap.

In this case, the money received from the investor will be placed in short term (e.g. 3 months) deposits in the money market. These deposits are then rolled over when they mature to generate a continuous stream of variable income. This income stream generated from the interest on these deposits is then paid over via a swap agreement with an investment bank, in exchange for an equity-linked payment at maturity. The advantage of this method over the traditional Zero Coupon Bond + Option method is that the money market usually presents a much lower risk of default compared to a zero coupon bond. It also leaves the product provider free to invest the money received from the investor into a higher-earning investment than the one offered in the money market, in which case, the provider will earn an additional return above the rate used in the swap contract (usually Libor or equivalent).

The graphs below compare the two different ways to build the same 5 years FTSE-linked product.