Pricing and Hedging Financial Derivatives: A Guide for Practitioners

10

Structured Products

Suggesting an investment in a structured product, given the aftermath of what has become known as the Global Financial Crisis, may well not be the best way to start a conversation with a prospective client, such is the tarnished reputation of the asset class.

It is certainly likely that many structured products had been created in the past for the benefit of the issuer rather than for the user but to dismiss all of them as irrelevant, overpriced and lacking in transparency would be a pity. Structured products come in many shapes and sizes and can offer extremely efficient solutions to the particular needs of many investors, especially those investors who cannot access directly the over-the-counter derivatives markets. In a sense, structured products are designed to meet specific needs that cannot be met from the standardized financial instruments available to the majority of investors.

10.1 DEFINITION

Before we discuss some of the main characteristics of structured products, we will describe what we mean by the catch-all term structured product.

The United States' Securities and Exchange Commission defined structured products as “securities whose cash flow characteristics depend upon one or more indices or that have embedded forwards or options or securities where an investor's investment return and the issuer's payment obligations are contingent on,¹ or highly sensitive to, changes in the value of underlying assets, indices, interest rates or cash flows”. ...