Myth #01 : Structured Products are a black box, extremely difficult to understand

Structured Products Complexity

Reality: While different structured products can have varying levels of complexity, they are never a black box. Let’s look back at our Apple-linked product above. Is it difficult to understand? Not if it is explained in plain language and especially without hiding any of the risks.

Why should I invest in it?

Because you will generate an income of 5% p.a., paid quarterly.

Can I lose money?

Yes, if Apple loses over 40% of its value, you will lose money. Should the stock, for example, drop by 45%, you would lose 45% of your invested capital.

Beyond the guaranteed income, what are the benefits of this solution?

You are protected against any downturn in the shares of Apple that does not exceed 40%. If, for example, in 12 months the stock has dropped 20%, you will still receive allyour invested capital back. Additionally, even in the case of drops exceeding 40%, the capital loss would be partially offset by the income which would anyway have been received.

Are there any additional risks I should be aware of?

The credit risk of the issuer. Structured products are typically issued by banks. If a bank was to default on its obligations, then you would also stand to lose part or all of the invested capital.

Does this product make sense for me?

Are you looking for income instead of growth? Is a 5% guaranteed annual income sufficient for you? At a time where the average BBB-rated US corporate bond yields 2.5% p.a., does the 5% yield linked to Apple seem like a good deal?Would you rather accept the risk of Apple dropping over 40% over the credit and duration risk on a BBB-rated corporate bond?

If you have answered YES to the questions above, the structured note could well make a whole lot of sense for you.

In summary, there is no black box. Structured products will do exactly as said on the tin, no more, no less. It is important that the tin is read and understood.

Structured Products Complexity

Myths And Realities About Structured Products

Source: Privatam

Structured products complexity