Structured products are investment solutions created by various financial instruments, such as bonds and options. The construction offers a high level of flexibility and thus great opportunities to adjust market exposure as well as return potential and risk preferences in accordance with prevailing market conditions and individual investment needs.
Structured products should be a natural part of any highly diversified portfolio, either as a complement to traditional fund and equity investments or as building blocks in a portfolio consisting solely of structured products with varying maturity, return profile and risk level. Structured products are also well suited for acquiring exotic, hard-to-reach markets where the opportunities to invest directly through shares or funds are limited.
The most common types of structured products are Capital Protected Notes, Sprinters, Autocallables and Warrants.
Capital protected notes
Capital protected notes consist of a bond and an option part. The bond component is the capital protection of the investment. The option may be linked to one or more underlying assets such as stocks or commodities. If the underlying assets develop positively during the maturity of the investment, a return will be paid in relation to this increase. If the return of underlying assets is negative, the nominal amount will be refunded.
A "Sprinter" resembles a capital-protected note, but lacks full capital protection. By giving up some of the capital protection, the investment allows for a higher exposure to the underlying market and thus a higher return potential. Sprinters usually have a risk barrier which means that the investor is protected against market losses up to a certain level, but risking losses at major market downturns.
Autocallables allows for a running coupon payment over the note’s lifetime. The development in the underlying assets are observed at a certain frequency (e.g. annually) and if the development is in line with certain predefined conditions, for example that no asset has fallen below a certain level of its starting price, the placement will pay a coupon. The investment may also expire prematurely. Like Sprinters, Autocallables usually have a risk barrier which partially protects against losses in case of a negative market development.
Warrants are very similar to options. The investment offers a high exposure in relation to the invested amount. It also has a high risk and in the event of a negative return in the underlying market, the entire amount invested is jeopardized.