What is a structured product?
Structured Products constitute an alternative to traditional financial investments and respond to the demand for customized solutions expressed by private investors.
Definition and fundamental principle:
A structured product is a hybrid financial instrument combining multiple components to offer the investor a tailored solution, blending partial or full capital protection with performance potential. Originally reserved for institutional investors, these products are now widely used in private wealth management.
The objective of structured products is to diversify the portfolio, optimize returns according to the investor's risk profile, and manage risk by adapting to market expectations.
Components of a structured product:
Structured products consist of two components, each playing a specific role in the construction of the product.
Component | Description | Functionality |
Bond component | Provides partial or full capital protection at maturity (excluding fees and taxes) | Government or corporate bond, often in the form of a zero-coupon bond, ensuring capital protection |
Derivative component | Includes financial instruments such as options, swaps, or other derivatives | Determines the performance linked to the underlying asset(s) and allows the structure to be adapted to anticipated market scenarios |
Structured Products can be based on all asset classes, thus offering a wide variety of underlying assets.
Categories | Examples |
Stock indices | CAC 40, MSCI World |
Individual stocks | 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 several categories, offering risk and return profiles tailored to investors' objectives and constraints.
A capital-protected product offers full or partial protection of the invested capital at maturity. The return of this product is linked to the performance of the underlying asset, sometimes with the application of a cap or a floor that respectively limits the maximum gain or the minimum loss possible.
A non-capital-protected product carries a higher risk of capital loss. In return, it offers a higher return potential, often through the use of leverage or complex financial mechanisms that amplify possible gains, but also losses.
Investments objectives
The investment objectives consist of optimizing returns according to the risk profile while ensuring effective portfolio diversification.
Optimization of the risk/return ratio
- Precise adaptation to the investor’s risk profile (from low to high)
- Response to specific needs, including protection against volatility or seeking returns in stable or declining markets
Portfolio diversification
- Easier access to assets or markets that are difficult to reach through traditional instruments
- Reduction of overall risk through thematic, sectoral, or geographic diversification
Functioning of a structured product
A structured product is a financial instrument issued by a bank, offering a return linked to the performance of underlying assets, with predetermined repayment and capital conditions.
Issuance by a bank or asset manager
- Fixed term, adapted to the desired investment horizon
- Predefined repayment and return conditions, including the possibility of full, partial, or no capital protection at maturity
Performance scenarios
- Dependence on the evolution of one or more underlying assets (stocks, indices, currencies, rates, commodities, etc.)
- Possibility of fixed or variable returns, with mechanisms such as barriers, caps, or floors influencing the final repayment
Advantages and Disadvantages
| Advantages of structured products | Disadvantages of structured products |
| Customization according to the investor’s objectives | Complexity of the mechanisms |
| Potential for higher returns compared to traditional investments | Risk of capital loss (depending on the type of product) |
| Diversification and risk management | Fees associated with structuring and management |
Structured products Markets
Structured products markets | Characteristics |
Over-the-counter (OTC) markets |
|
Organized markets |
|
Regulations and Supervision
- Oversight by financial authorities, notably the Autorité des marchés financiers (AMF) in France
- Enhanced transparency through key information documents (KID) and prospectuses detailing characteristics and risks
- Obligation for advisors to inform and assess the suitability of the product for the investor’s profile
Specific Use Cases
- Climate structured products provide exposure to indices related to climate and environmental issues, integrating ESG themes such as renewable energy, sustainable development, and fair trade, combining performance with responsibility.
- Credit structured products are linked to the performance of a single issuer or a basket of issuers and are used to hedge or speculate on credit risk.
Glossary
Term | Definition |
Barrier | Underlying asset level triggering predefined events (redemption, capital protection deactivation, bonus payment). |
Correlation | Relationship between the performances of two underlying assets. |
Issuer | Legal entity issuing the debt or product. |
EMTN ( Euro Medium Term Note ) | Program often used for issuing structured products. |
Forward | Current price of an asset to be delivered and paid in the future. |
Option | Contract granting the right, but not the obligation, to buy (call) or sell (put) an underlying asset at a fixed price. |
Cap | Maximum performance of an underlying asset used to determine the final redemption of a structured product or to set a recorded level at an observation date. |
Floor | Minimum performance of an underlying asset used to determine the final redemption of a structured product or to set a recorded level at an observation date. |
Strike Price | Price at which one commits to buy or sell an asset if the option is exercised. |
Spot Price | Price of a financial asset when it is paid for and delivered immediately. |
Underlying asset | Asset on which the structured product is baded. |
Spread | Percentage difference in performance between two underlyings |
Volatility | Measure of the magnitude of price fluctuations of an asset. |
Zero coupon | Zero-coupon bonds do not pay periodic coupons. They are purchased at a price lower than their maturity value. The holder of a zero-coupon bond receives a single payment at a specific point in the future. In the case of Structured Products, the zero-coupon bond ensures capital protection at maturity. |
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