Chapter 9: Structured Products Flashcards
What is a structured deposit
A structured deposit is essentially a combination of a deposit and an underlying financial instrument, where the return is dependent on the performance of the underlying financial instrument.
Structured deposits are a type of deposits and are different from structured notes. The distinguishing feature is that for a structured deposit
the principal sum, with or without interest, has to be repaid in full at maturity. investors may potentially lose part or the whole principal sum.
What is a structured note
A structured note is a debt instrument/debenture, which is governed by the Securities and Futures Act (“SFA”). The performance of the note, such as coupon payment or the market value of the note is linked to the performance of other underlying instruments such as a stock, indices, interest rates, credit markets (“CDOs” or “CDSes”) or even a basket of these instruments.
What is a dual currency investment
A dual currency investment involves a base currency, an alternate currency and an option in the currency pair. It can also be considered as a type of yield enhancement structured product. The MAS has specific guidelines on
A DCI is in fact a deposit in the base currency, and selling put option for the alternative currency on the maturity sum of the deposit.
What are the potential risks and suitability and uses of DCI
A DCI might provide an opportunity to earn potentially higher interest rates than time deposits for an investor who has a natural demand for the alternate currency.
What is an equity linked note
An equity linked note employs an issuer’s note and a short-put, which is either linked to a stock index or a particular stock. An ELN may pay a higher yield than market rate of interest arising from the value of the short option position associated with the underlying stock or index.
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What are the uses and suitability of an equity linked note
Equity linked notes with physical settlement can be used by an investor who would like to own the shares of Company ABC Ltd, but feels that the current price of ABC stock is too high. Thus, a strategy for such an investor is to buy an ELN that has an out-of-money put on ABC Ltd shares.
What is a Range Accrual Note
This is a structured note where the investor receives a target level of return if a reference index “falls” within an agreed range, failing which the client receives less / no interest, but his/her principal will not be affected. The reference index can be a stock index such as Dow Jones index or an interest rate benchmark such as LIBOR or Singapore SOR (Swap offer rate).
The observation period can be daily, week or monthly, though a daily observation is very common. It is also common for the payout to be zero when the index is outside the agreed range.
What is a credit linked note
In a CLN, the issuer embeds a credit insurance known as credit default swaps (“CDS”) linked to a particular company (referred to as “reference entity” in the term sheet). The issuer has a fixed income investment, which is used as collateral against the credit insurance or CDS sold in the market. The CLN allows the issuer to transfer the credit risk on the reference entity to the investors on the CLN.
What is a CDS
the credit risk on the reference entity to the investors on the CLN.
A CDS is akin to providing credit insurance on a reference entity. It is a contract between two counterparties, whereby the “buyer” pays periodic payments (insurance premium) to the seller in exchange for the right to a payout if there is a credit default of the “reference entity”.
What is defined as a credit default
