Structured Products

Structured product — a financial instrument created by combining traditional securities (as a rule, bonds) with derivatives in order to achieve a specified risk and return profile. Structured products allow investors to obtain exposures unattainable through standard instruments: capital protection with participation in market growth, enhanced yield with limited risk.

Architecture of a structured product. The typical structure: 90–95% in fixed income instruments (zero-coupon bond up to face value) plus 5–10% in options. Example: an investor invests 100 units. The issuer allocates 95 to a ZCB (which will grow to 100 over 3 years) and purchases call options on an index for 5. Result: 100% capital protection plus participation in index growth. The participation rate depends on the cost of options and the interest rate level — with low rates it is lower, with high rates — higher.

Types of structured products. Capital Protected (with capital protection): guarantee of 100% or 90% return plus partial participation in growth. Principal at Risk (without full protection): Enhanced Yield Notes — sale of options generates an increased coupon due to the risk of losses. Reverse Convertibles: high coupon, but if the underlying asset falls below the barrier, the investor receives shares instead of cash. Barrier Notes: conditional protection or participation, depending on the achievement of a price barrier.

Key parameters: Strike level (the level at which participation begins), Barrier level (the trigger for changing conditions), Participation rate (percentage of underlying asset growth), Maturity (term — usually 1–5 years), Underlying (S&P 500, Eurostoxx, individual stocks, commodity index).

Risks of structured products. Credit risk of the issuer — if the issuing bank goes bankrupt (like Lehman Brothers in 2008), the investor loses even the “protected” capital. Liquidity risk — the secondary market is often absent or prices are unfavorable. Complexity risk — investors do not always understand the full risk profile. Hidden fees — bid-ask spread and margin can reach 2–5% of face value. PRIIPs regulation in the EU requires provision of a KID (Key Information Document) describing risks and costs.