Structured Product
Structured Products are an alternative to traditional financial investments and reflect private investors’ growing demand for tailored investment solutions.
Definition and Core Principle
A structured product is a financial instrument that combines several components to offer investors a tailored solution, balancing partial or full capital protection with potential performance. Initially reserved for institutional investors, structured products are now widely used in private wealth management.
The objectives of structured products are to diversify portfolios, optimize returns according to an investor’s risk profile, and manage risk by adapting to market expectations.
Components of a Structured Product
Structured products are generally composed of two elements, each serving a specific purpose in the product's design.
| Component | Description | Function |
|---|---|---|
| Bond Component | Provides partial or full capital protection at maturity (excluding fees and taxation) | Government or corporate bond, often structured as a zero-coupon bond |
| Derivative Component | Incorporates financial instruments such as options, swaps, or other derivatives | Determines performance linked to the underlying asset(s) and allows the structure to be tailored to anticipated market scenarios |
Structured Products can be linked to virtually all asset classes, offering a broad range of underlying investments.
| Category | Examples |
|---|---|
| Equity Indices | CAC 40, MSCI World |
| Individual Equities | Shares of specific companies |
| Commodities | Oil, metals, etc. |
| Currencies | EUR/USD |
| Interest Rates | Bonds, interbank rates, etc. |
Types of Structured Products
Structured products come in various forms, offering risk-return profiles tailored to investors’ objectives and constraints.
A capital-guaranteed product provides full protection of the invested capital at maturity. Its return is linked to the performance of the underlying asset and may be subject to a cap or floor, limiting the maximum gain or defining a minimum payoff.
A non-capital-guaranteed product involves a higher risk of capital loss. In return, it offers greater return potential, often through leverage or more sophisticated financial mechanisms that can amplify both gains and losses.
Investment Objectives
The objective is to optimize risk-adjusted returns while achieving effective portfolio diversification.
Optimizing the Risk/Return Profile
- Precise adaptation to the investor’s risk profile (from conservative to aggressive)
- Ability to address specific needs, such as protection against volatility or the search for yield in stable or declining markets
Portfolio Diversification
- Easier access to assets or markets that may be difficult to reach through traditional investment instruments
- Reduction of overall portfolio risk through thematic, sectoral, or geographic diversification
How a Structured Product Works
A structured product is a financial instrument issued by a bank that offers a return linked to the performance of one or more underlying assets, with capital protection and repayment conditions defined in advance.
- Defined investment term aligned with the investor’s time horizon
- Pre-established repayment and return conditions, including full, partial, or no capital protection at maturity
Performance Scenarios
- Dependent on the evolution of the underlying asset(s) (equities, indices, currencies, interest rates, commodities, etc.)
- Potential for fixed or variable returns through mechanisms such as barriers, caps, or floors that influence the final repayment amount
Advantages and Disadvantages
| Advantages of Structured Products | Disadvantages of Structured Products |
|---|---|
| Tailored to investors’ objectives | Complexity of the underlying mechanisms |
| Potential for higher returns than traditional investments | Risk of capital loss (depending on the product type) |
| Portfolio diversification and risk management | Fees associated with structuring and management |
Structured Product Markets
| Market | Characteristics |
|---|---|
| Over-the-Counter (OTC) Markets | • Bilateral transactions between the issuer (bank) and the investor • Greater flexibility in product customization |
| Organized Markets | • Less common for structured products • Examples include Euronext, offering a degree of transparency and liquidity |
Regulations
- Oversight by financial regulators, including the Autorité des Marchés Financiers (AMF) in France
- Enhanced transparency through Key Information Documents (KIDs) and prospectuses describing product features and risks
- Obligation for advisors to assess the suitability of the product for the investor's profile and provide appropriate information
Specific Use Cases
- Credit structured products are linked to the creditworthiness of an issuer or a basket of issuers and are used either to hedge against or gain exposure to credit risk.
Glossary
| Term | Definition |
|---|---|
| Barrier | A predefined level of the underlying asset that triggers specified events (product redemption, deactivation of capital protection, bonus payment, etc.). |
| Correlation | A measure of the relationship between the performance of two assets. |
| Issuer | The investment bank issuing a debt instrument (e.g., EMTN or Certificate). |
| EMTN (Euro Medium Term Note) | A programme commonly used for issuing Structured Products. |
| Forward | The current price agreed upon today for an asset that will be delivered and paid for in the future. |
| Option | A contract granting the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price within a specified period. |
| Cap | The maximum level of performance used to determine the final payoff of a structured product or a value recorded on an observation date. |
| Floor | The minimum level of performance used to determine the final payoff of a structured product or a value recorded on an observation date. |
| Strike Price | The price at which the holder commits to buying or selling an asset if the option is exercised. |
| Spot Price | The price of a financial asset for immediate settlement and delivery. |
| Spread | The performance difference between two underlying assets, expressed as a percentage. |
| Volatility | A measure of the magnitude of price fluctuations of a financial asset. |
| Zero-Coupon Bond | A bond that does not pay periodic interest. It is purchased at a discount to its maturity value and provides a single payment at a specified future date. |