Investors considering investments that are most appropriate for their needs often focus on the payoff pattern expected from each potential opportunityappreciation, income, a combination of both? Assume, for example, that an investor has a diversified portfolio of stocks and income-producing bonds. A structured derivative product a conservative investor may consider is called a principal protected note . In lieu of coupon payments, payoff at maturity equals the return of the principal investment plus any appreciation that may result from price changes of the underlying asset on which the instrument is based, including perhaps an asset that would normally be too risky for the investor, such as currency exchange rates or the stocks of an emerging market economy. On the other hand, a speculative investor may seek short-term returns from warrants or exotic options that are many times greater than his or her initial investment with the knowledge that such an investment could expire worthless.
Structured products are financial instruments and contractual obligations that are designed, created, bundled, issued, and sold to investors to meet specific investment objectives. The term structuring or financial engineering refers to a process of creating a wide variety of financial products whose payments are linked to or based on one or more underlying assets, such as U.S. and international stock prices and interest rates, currency exchange rates, commodity prices, and indices.
The linkages between assets can take the form of:
Why Use Structured Financial Products?
Investors around the world use structured products to:
Structured financial products are used by a wide variety of investors, including:
The types of structured products and investment strategies discussed in this book include warrants, index- and other asset-linked notes, convertible securities, equity-linked notes, exotic options and warrants, swaps, investment trusts, over-the-counter private placements, monetization and hedging strategies for restricted stock and other concentrated equity positions, equity-linked capital market transactions for corporations, and a structured shelf registration and equity distribution program for corporate issuers and affiliated shareholders.
One way to convey complex concepts is by linking them to familiar ones. Most investors are familiar with traditional mechanisms for financial wealth accumulation and preservationstocks and bonds. Structured products are like stocks and bonds with new features attachedsimilar to purchasing a new automobile and adding a few extras such as power windows, cruise control, and a computerized braking system.
As a backdrop to discussions about various types of structured products and how they are created, Chapter 2 sets an important tone for the book. It highlights many of the responsibilities of officers and directors overseeing structured product development, trading, and risk management activities.
|Previous Chapter||Table of Contents||Next Chapter|