Others have realized that Structured Products can be an efficient tool for investing in all asset classes, including fragmented or difficult-to-access markets, with tailored protection. Without doubt, as investment solutions in their own right, structured products represent an original and effective alternative to the usual financial investments. They enable investments in a wide range of underlying assets equities, interest rates, foreign exchange, indices, commodities Structured Products can therefore provide tailored solutions in line with a specific strategy in all market configurations.
Whilst they are a useful tool for portfolio management and risk control, they are nonetheless very sophisticated. This sophistication is needed to meet the specific requirements of investors who each have their own investment profile and market knowledge. Structured Products can be loosely defined as a savings or investment products where the return is linked to an underlying asset with pre-defined features maturity date, coupon date, capital protection level ….
A Structured Product can be seen as a product package using three main components:. The capital guarantee or protection is provided by the issuer or its guarantor, except in the case of default. Also, as a result of the prevailing low interest rates, the possibility to structure guaranteed deposits is becoming more complex, and therefore, markets will likely start offering more and more products with some risks to satisfy the demands of customers looking to keep profit ratios.
BBVA and Bloomberg join forces to offer structured product prices in real-time. Corporate Responsibility. In , green bond issues totaled The main issue currencies are the U. BBVA Global Markets Research estimates that in these issues will reach at least 50 billion dollars, on a global basis.
What are you looking for? Press Enter Predictive Search. Close panel Close panel Close panel. Shareholders and investors. BBVA in the World. BBVA Earnings. Financial calendar. The best structured products books will provide an incredible amount of depth and detail compares to this article, so please check those out, or perhaps books about derivatives , if its the financial instruments element which interests you most.
It might look and sound like a stock market investment, but you are actually entering into an agreement with a single financial institution. This counterparty is usually an investment bank. Structured products cannot be held within a stocks and shares ISA. Structured products advertise attractive headline rates of return.
However, the actual amount that you will receive back is actually variable. The agreement you sign will clearly set out the rules which govern the payment. These rules link the payout to the performance of external indexes, such as the FTSE You may receive back less than the advertised return, and in some scenarios, you may suffer a loss.
The catch is that it only pays this return if the FTSE index closes the three year period at a higher level than it began. If the index closes below its starting level, then the provider will only return your original invested amount at the end of the three years. This is a very different set of outcomes to an ordinary stock market investment in the FTSE — where your return is based on the actual return of the index.
Overall — you are giving up the chance to participate in a large stock market rally but, in exchange, you are protecting yourself against downward movements. This investment appears to be very generous. This is actually a higher return than you could expect from the stock market overall. This means it will return money to investors early together with the return to date.
So this might be a six-year investment, but it might not. This means that if the FTSE has fallen by half, you will only receive half of your investment back. To learn more about the different levels of structured product protection , see our dedicated article. When I first discovered structured products many years ago, I scratched my head. What are they investing in which ensures they can meet their promises?
A structured product is a black box. Magical returns appear from it, but providers do not publish the inner workings to educate investors as to how structured products actually work. You should never invest in a product that you do not understand. Without a clear idea of the mechanics of an investment, you will not ever feel fully informed of the risks. This bond takes care of returning the original stake.
What happens next is financial wizardry. The manager strikes a deal with a party that wants the opposite. It works like a wager on the direction of the stock market. A bond and a bet. This is the portfolio that sits silently behind the prospectus. The making wagers with other institutions a key part in creating such an unusual product. These deals are called financial derivatives. They still invest a portion of the investment in a bond.
Again, they will spend the leftover cash on derivatives which will provide a bonus if the FTSE rises. The answer is that the managers can afford to buy larger derivatives, i.
Where does the extra cash come from? As an investor, it sounds normal to be told that if the stock market falls — you will lose money. But when you consider that structured products are backed by a low-risk bond — the capital loss risk begins to look very artificial. This deal would provide someone with a large and very welcome payout if the stock market were to crash.
The manager will receive a considerable sum of cash in return for taking on this obligation. In a straight forward way, the manager has created a trade-off. The investment will perform terribly in poor market conditions, but will provide a sweet return in the good times.
Now that we know what is going on behind the scenes, we can actually pull out some interesting points that all investors should know before they invest. Each investment or derivative they have entered into has been at market prices and should simply deliver a fair return for the risks taken.
They have simply taken very specific risks in order to maximise the return they can promise an investor. You will always receive the same level of return per unit of risk. A structured product usually involves less or more risk than a typical equity investment.
Structured products are not get-rich-quick schemes. Structured products appeal to investors because they take advantage of two elements of human psychology:.
These get our brain quite excited about structured products. To the point where we might accept one which is mathematically worse than other investment opportunities you have rejected. The complex pattern of returns offered by structured product look like a cynical attempt to hoodwink loss-adverse individuals into exposing themselves to huge losses. Although there is only a small chance of this occurring in any given year — such an event will occur again.
This could be in spite of the investment mathematically containing the same risk as any other similarly yielding investment. As humans, we are so averse to even small losses, that we want to eliminate them, even if it means producing an extremely negative outcome in the worst-case scenario. In my opinion, cautious investors should be sold cautious investments — not ones which offer no protection in the event of a serious market crash. Therefore a nil return after a number of years is a loss.
Our failure to notice opportunity costs means that investors may interpret many outcome scenarios more positively than they should. To only receive back your starting investment after 6 years is a disaster. As we said above, a structured product is a black box. Investors are not granted the privilege of seeing the underlying portfolio of bonds and derivatives.
This is entirely legitimate because the relationship between an investor and a provider is an IOU — a promise to pay.
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