The Products


1.1.1. The Birth of Structured Products


The birth of SPs dates back to the early 90's when IB's were looking for ways to attract investors into the equity markets.

IB's were looking for innovative solutions with more sophisticated payoffs on various assets --> structured products. 

These products allow investors to have an easy access to innovative payoffs through different issuing wrappers in a tax efficient manner (EMTN, insurance life contracts, ...).

For the business to expand, the development of a secondary market was necessary to provide liquidity. 


SPs constitute an excellent solution to invest in a product with a tailor-made R/R profile in a cost-effective manner. 


1.1.2. Structured Product Wrappers


A structured product can be launched in different wrappers. 

Each wrapper has a certain legal status to meet the client's requirements --> investment preferences, regulatory issues, ...


Notes and bonds

They are debt instruments issued by the IB's and are typically issued as senior unsecured debt that can be listed or unlisted.

Investing in a note is not risk-free since the investor still faces the risk that the issuer of the note defaults.

Furthermore, the investor could be selling an option inside a note, putting his capital at risk. 


OTC Options or Warrants

 The holder of the warrant is entitled to buy a specific amount of shares in a company at an agreed price. 



1.1.3. The Structured Note

It is composed of: 

- a non-risky asset providing a percentage of protected capital.

- a risky asset offering leverage potential.


The "non-risky" part can be a zero coupon (ZC) bond or a bond that pays fixed coupons throughout the life of the note.  

The risky part can be composed of options on single or multiple assets.

Options enable their holders to make additional profit with high leverage potential.

These are risky investments since their value can vary greatly.

An option's price is non-linear and is subject to many market parameters.



Example of an ELN


ELNvalue = ZCprice + Callprice + P&L @ origination


The figure below emphasizes the fair value of the product quoted in secondary markets after the issue has been done.

The non-risky part has an initial price linked to IRs.

High IRs decrease the initial value of the ZC bond. 

It therefore enables the structurer to create an attractive payoff through issuing increased upside in the equity.


During the life of the structured note, the value of the non-risky part increases when IRs decrease.

At maturity, the value of this ZC bond is equal to 100% of the notional.

On the other hand, the value of the risky part is non-linear and fluctuates depending on many market parameters.


Capture d e cran 2016 05 02 a 21 09 37


Capture d e cran 2016 05 02 a 21 22 52

Add a comment