What are
structured products?

Overview What are structured products? Investing in structured products Terminology guide History of structured products Selected insights FAQs – structured products
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.

Selected insights
Analysis: oil-linked structured products

02 Jul 2024

Analysis: oil-linked structured products
Spotlight on France: single stock indices, rates prosper, mixed fortunes for decrement

20 Jun 2024

Spotlight on France: single stock indices, rates prosper, mixed fortunes for decrement
Performance: underlyings v structured products in the US market

18 Jun 2024

Performance: underlyings v structured products in the US market
Why invest in structured products?

Structured products represent an add-on to classic investments such as stocks or bonds. They provide investors with different risk profiles and work in any market scenario. Some of their key benefits are outlined below:

Capital protection

One of the key features of structured products is that they typically offer some form of capital protection. Depending on your preferences, structured investments are available that completely minimise risk exposure.

Yield increase

Structured products can also provide a higher yield in sideways markets.

Leverage

Structured products can give leveraged exposure to markets.

Why invest in SRP
Capital protected products

At the inception of the structured product market, capital protected notes were the most popular product type. They were attractive because of the simple concept and were made possible by higher interest rates than are seen today.

Capital protected products offer at maturity a minimum return of the initial capital invested, plus a potential upside linked to an equity market. The two basic pricing alternatives are:

a zero coupon bond + option combination; or an interest rate swap + rolling short-term deposits + option combination

We will take the example of a product offering after five years a minimum capital return of 100% plus 100% of any rise in the Eurostoxx 50 over the investment period. The traditional way to build a guaranteed equity product would be to split the money received from the investor into two main building blocks:

An upfront deposit also known as a zero coupon deposit or zero coupon bond, which is guaranteed (as long as the deposit taker or bond provider do not default on their obligations) to grow to 100% at the maturity date.

An option premium used to purchase at-the-money call options on the Eurostoxx 50, offering upside exposure. For example, if the Eurostoxx 50 was at a level of 2,500 at the start of the investment and rises to 3,500 after five years, the option will pay out the difference between the strike price (the initial index level of 2,500) and the final index level, resulting in a gain of 1,000 points (3,500 minus 2,500), i.e. the rise in the index over the investment period. Otherwise, if the index falls, the option expires worthless.

Illustration
Key factors that influence pricing:

They impact the price of structured products in different ways as this is what defines the bond or deposit. This is the most important factor for capital protected products: this is the part of the product which allows the full capital to be returned either at maturity, or if the conditions of the product are met and the plan matures early. A higher interest rate means less needs to be set aside to ensure a full return of capital and leaves more to spend on the options, generally making the investment return more favourable.

Following the 2008 crisis, the perceived counterparty risk became an increasingly important factor for investors and their advisors. The credit rating is usually inversely correlated to the credit spread that issuers pay for cash. As such, the higher the credit spread (i.e. the lower the rating), the higher the return offered.

This is a statistical measure of dispersion of potential returns around the current market price and is measured via the standard deviation of the underlying asset or market index. Generally, the higher the volatility, the riskier the asset and the more price variance there is likely to be. The volatility of the underlying asset is clearly important in assessing the likelihood of the option being exercised. It is also the one factor that cannot be directly observed. In summary, low volatility makes options cheaper, while high volatility makes them more expensive.

Equity holders, as owners of the company, are generally entitled to a share of the profits, which may be paid to them in the form of dividends. On structured products, the investor is not entitled to receive the dividends that the stock pays. However, the dividend is discounted from the option premium, allowing the option to become cheaper, hence increasing participation or capital protection.

This is the level at which the structured product payoff starts to provide a positive return. Usually, if the strike price is above the underlying price, the option cost decreases as the likelihood of a positive return is lower compared with a strike price below the underlying spot price.

This is the period between the initial date and the maturity date. Usually, the cost of an option increases with the term. Nevertheless, the annualised cost decreases. This is why when interest rates are low, the term of structured products increases to offer the same participation or capital protection.

Yield enhancement products

For traditional investments, yield enhancement is achieved through leverage, often in the form of borrowing to finance additional exposure.

With structured products, yield enhancement can be achieved by limiting performance or accepting some degree (part or all) of capital investment risk.

Many of these strategies are achieved by investors being short volatility, i.e. selling an option strategy, that allow the investors to obtain the corresponding premium to feed back into the structured product.

Simple forms of yield enhancement can be achieved by:

  1. taking a higher degree of credit exposure to the product issuer;
  2. capping or limiting the maximum achievable return;
  3. taking a limited capital investment exposure (e.g. 10%); or
  4. investing in products with early maturity (autocall) features.
Illustration
Key factors that influence pricing:

A statistical measure of dispersion of potential returns around the current market price which is measured via the standard deviation of the underlying asset or market index. The higher the volatility, the riskier the asset and the more price variance there is likely to be. The volatility of the underlying asset is clearly important in assessing the likelihood of the option being exercised. It is also the one factor that cannot be directly observed. In summary, high volatility makes the investor obtain a higher yield.

For capital at risk products, it is common to reduce risk by introducing a barrier level below the initial strike level. This means that the capital is protected until this barrier is reached (soft protection). As such, the lower the barrier level, the higher the protection level is likely to be.

Equity holders, as owners of the company, are generally entitled to a share of the profits, which may be paid in the form of dividends. On structured products, investors are not entitled to receive dividends. However, the dividend is discounted from the option premium, allowing the option to become cheaper, hence increasing participation or capital protection.

This is found in many of longer maturities of yield enhancement products, and allows investors to obtain the capital and coupons before maturity if the underlying is at or above its initial level on a specific observation date. This feature means that the more frequent observation dates are, the lower the potential return to the client.

Leverage products

Leveraged forms of yield enhancement involve taking an increased degree of capital investment risk.

Leverage products give a higher participation to the underlying asset compared with a direct investment. This is achieved by using the premium derived from the sale of an option strategy, to increase participation.

The underlying products will be similar to the simple capital protected products but will contain additional option or credit exposures embedded within the structured product that enable the potential for enhanced returns, at the risk of capital loss (partial or full).

Leveraged forms of yield enhancement can be achieved by:

  1. increasing the level of capital investment exposure to 50% or 100%;
  2. investing in products with barrier features; or
  3. investing in products with combinations of barrier and early maturity (autocall) features.
Illustration
Key factors that influence pricing:

A statistical measure of dispersion of potential returns around the current market price, measured via the standard deviation of the underlying asset or market index. The higher the volatility, the riskier the asset and the more price variance there is likely to be. The volatility of the underlying asset is clearly important in assessing the likelihood of the option being exercised. It is also the one factor that cannot be directly observed. In summary, high volatility makes the investor obtain a higher yield.

Equity holders, as owners of the company are generally entitled to a share of the profits, that may be paid to them in the form of dividends. On structured products, they are entitled to receive dividends. However, the dividend is discounted from the option premium, allowing the option to become cheaper, thus increasing participation or capital protection.

Following the 2008 financial crisis, the perceived counterparty risk became one of the most important factors for investors and their advisors. The credit rating is generally inversely correlated to the credit spread that issuers pay for cash: as such, the higher the credit spread (i.e. lower rating), the higher the return offered.

Types of structured products

Product group: Yield enhancement
Product type: 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
  • Chance to accumulate return thanks to multiple observations
  • Can be used with a spectrum of boundaries to cover many market eventualities in a combination with a range feature
  • May be used successfully in a low interest rate environment
Cons
  • Provides no return when market conditions don’t match predictions.
Accumulator

Product group: Leverage
Product type: 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
  • Underlying can be bought at a discount to the initial spot price
  • Acquisition of more than one unit of the underlying asset when gearing is triggered
Cons
  • Capital at risk

Product group: Capital Protection
Product type: Growth
Direction of trade: Bull

This is a mountain range type growth product linked to the performance of a basket of underlying assets. Provided that none of the basket constituents breach a predefined barrier below their initial fixings, the product will pay a predetermined high yield at maturity. If not, investors will receive their capital back plus participation in the final positive performance of the underlyings’ basket.

Pros
  • Capital protection
  • Potential for a high coupon payment at maturity if markets rise as expected
Cons
  • Increased market volatility reduces potential for high returns

Product group: Capital Protection
Product type: Growth
Direction of trade: Bull

This is a mountain range type growth product linked to the performance of a basket of underlying assets. The product pays out the maximum between the sum of the initial investment and a fixed coupon, and the sum of the initial investment and participation in the final performance of the underlyings’ basket. The level of the fixed coupon and participation rate depends on whether and when the worst-performing basket constituent reaches a predefined barrier below its initial fixing – the later a barrier breach occurs, the higher the coupon/participation rate.

Pros
  • Capital protection
  • High correlation among basket constituents paired with rising markets can result in a high return at maturity
Cons
  • Increased market volatility reduces potential for high returns
A performance chart of an autocallable structured product

Product group: Capital protection, yield enhancement
Product type: 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
  • Higher annualised return when product is autocalled
  • Higher return as long as the underlying increases moderately
Cons
  • 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: 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
  • Chance for full notional return in case of stable and rising markets
  • Additional level of notional protection in moderately falling markets
Cons
  • Capital at risk
  • Capped potential profit

Product group: Participation
Product type: Growth and income
Direction of trade: Sideways

A strategy, also known as buy-write or covered call writing, which generates a return from the purchase of (an) underlying share/shares and the simultaneous sale of a call option or options on that same underlying.

Pros
  • Premiums from selling call options can offset losses from underlying price decreases
Cons
  • Capital at risk
  • Can underperform in persistently rising markets
CPPI

Product group: Participation
Product type: 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
  • Soft notional protection
  • Protection on the downside of the market
  • CPPI investments mimic direct investment in the underlying asset in rising markets
  • Rapid de-risking through funds allocation in cash and bonds during market sell-off
Cons
  • Capital at risk
  • Missing out on immediate participation in upside markets while funds are allocated from risk-free to riskier assets
  • Locks in losses due to smaller participation in a potential post-crisis rally

Product group: Capital protection
Product type: 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
  • Higher return than the prevailing market rate for callable notes
  • Early redemption at a higher re-investment rate for puttable notes
Cons
  • Lower return than the prevailing market rate for puttable notes
  • Early redemption at a lower re-investment rate for callable notes
Capital Protection with Knock-Out

Product group: Capital protection, participation
Product type: 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
  • Capital protection
  • Minimising risk while keeping exposure to the underlying asset’s performance
Cons
  • Limited upside potential due to capped return
Capped Participation

Product group: Capital protection, participation
Product type: 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
  • Capital protection
Cons
  • Limited upside potential
  • Lower return than if holding the underlying if it outperforms
Cliquet

Product group: Participation
Product type: 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
  • Higher participation compared to capped growth
Cons
  • Capital at risk
  • If built on a basket, the worst performing underlying would limit the return potential

Product group: Products with reference entities
Product type: 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
  • Higher interest than the prevailing market rate
Cons
  • Capital at risk
  • 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: 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
  • Minimum return guaranteed at maturity or during the lifetime of the product
Cons
  • Predefined maximum return
Dual Currency

Product group: Yield enhancement
Product type: 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
  • Upside potential when strengthening base currency
  • Higher return due to usually shorter tenor
Cons
  • Capital at risk
  • Potentially significant losses because of the currency conversion at a predetermined exchange rate
Floater

Product group: Capital protection
Product type: 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
  • Capital protection
  • Income payment, potentially above the prevailing reference rate
  • Minimum return even when the reference rate is falling
Cons
  • Limited income potential through capped coupon amount

Product group: Capital protection
Product type: Growth
Direction of trade: Bull

This is a mountain range type growth product linked to the performance of a basket of underlying assets. The return of the product is derived from the arithmetic average of the returns of the best-performing basket constituents as recorded on predetermined observation dates over the life of the product. As only one constituent remains at maturity, its final performance is added to the payoff calculation.

Pros
  • Capital protection
  • Potential for a high final payout if markets rise persistently
Cons
  • Increased market volatility reduces potential for a high return

Product group: Yield enhancement
Product type: Growth
Direction of trade: Bull

This is a mountain range type growth product linked to the performance of a basket of underlying assets. Over the life of the product, the best- and worst-performing basket constituents are eliminated until a reference selection of assets remain, which are then used for the final return calculation. At maturity, the product pays out the initial investment plus participation in the performance of the reference underlyings’ basket.

Pros
  • High chance of full capital return and above average yield in rising markets
  • Often subject to a minimum return above the initial investment
Cons
  • Capital at risk

Product group: Leverage
Product type: Growth
Direction of trade: Bull, bear

Leverage products with stop loss, such as mini futures, are highly speculative open-end structures that provide an over-proportional participation in the positive (negative) performance for long (short) positions and can lead to a total capital loss. The knock-out barrier of mini futures (also called stop-loss level) is always set above (below) the strike price for long (short) positions, thus ensuring at least some return on investment in case of a knock-out event (breach of the knock-out barrier).

Pros
  • Over-proportional gains in favourable market conditions
  • The stop loss barrier in mini futures ensures at least some residual value is returned to the investor in unfavourable market conditions
  • Little or no volatility impact
Cons
  • Over-proportional losses in unfavourable market conditions
  • Total capital loss in case of big market swings

Product group: Leverage
Product type: Growth
Direction of trade: Bull, bear

Leverage products without a stop loss group together various representatives of the warrants family, including knock-out (turbo) and inline warrants (both types equipped with a knock-out barrier), classic and discount warrants. These products provide disproportional participation in the positive (negative) performance for long (short) positions, and can be open-ended or have a finite maturity date. Investing in warrants can lead to total capital loss.

Pros
  • Over-proportional gains in favourable market conditions
  • Little volatility impact for knock-out (turbo) warrants
Cons
  • Over-proportional losses in unfavourable market conditions
  • Total capital loss in case of a knock-out event
Leveraged Upside

Product group: Capital protection, participation
Product type: 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
  • Geared participation in the upside potential of the underlying asset
  • Uncapped return depending on product terms
  • Limited capital protection in moderately falling markets
Cons
  • Capital at risk
  • Capped return depending on product terms
Range

Product group: Capital protection, yield enhancement
Product type: 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
  • Can be used with a spectrum of boundaries to cover many market eventualities
Cons
  • Provides no return when market conditions don’t match predictions.
Reverse Convertible

Product group: Yield enhancement
Product type: 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
  • Chance of full notional return in case of stable and rising markets
Cons
  • Capital at risk
  • Capped potential profit
  • Income can be conditional upon underlying asset’s performance
Spread

Product group: Capital protection, participation
Product type: 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
  • Getting a return from shorting one of the underlyings and anticipating its further decrease; not possible in the equity market
Cons
  • Limits the potential profit to a predefined range
  • Risk of no return for prolonged periods if the interest rate curve stays flat
Twin-Win

Product group: Capital protection, yield enhancement
Product type: Income
Direction of trade: Side

This is a market-linked income product linked to a reference entity (a company or a government) and an interest rate, such as a constant maturity swap rate. The product offers a fixed unconditional coupon for the first years of its lifecycle after which cash flows become dependent upon the level of the relevant interest rate. If the sum of the issued coupons has reached a predefined level on any of the observation dates, and provided the reference entity has remained solvent, the product is autocalled at par. Capital invested in target return notes can be fully or partially protected at maturity.

Pros
  • Above market average yield
Cons
  • Additional credit risk introduced through the reference entity (corporate or government bond)
  • Capped maximum return
Uncapped Participation
Cons
  • Performance mimics direct investment in the underlying when barrier is breached
Uncapped Participation

Product group: Capital protection, participation
Product type: 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
  • Capital protection
  • Unlimited upside potential
Cons
  • Potentially lower return than a direct investment in the underlying in bullish markets
Wedding Cake

Product group: Capital protection, yield enhancement
Product type: 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
  • Higher return over-performing the underlying in flatter markets
Cons
  • Lower return as soon as any of the barriers is breached, even in rising markets
  • Capital is protected only if the product is held until maturity

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