Structured Derivative Products Flashcards
Structured Derivative Products
- Pre-Packaged Investments normally include assets linked to interest plus one or more derivatives.
- Tied to an index or basket of securities, designed to facilitate highly customised risk-return objectives.
Risks Associated with SDPs
Fairly complex, may not be insured by the FDIC and lack liquidity.
Returns on SDPs
Issuers normally pay returns on structured products once it reaches maturity.
Relations to other things
Closely related to traditional models of options pricing.
May contain other derivative categories such as swaps, forwards, and futures.
Principal Protection
If Underlying Asset is positive, between 0 and 7.5%, investor earns double the return.
If greater than 7.5% investor’s return will be capped at 5%.
Negative Leverage on Underlying Asset
If asset return is negative, investor participates one-for-one on the downside so there’s no negative leverage.
Strategy behind Principal Protection
Consistent with the view of a mildly bullish investor, on e who expects positive but generally weak performance, looking for an enhanced return above what they think the market will produce.
Liquidity Risk with SDP
Full extent of returns is from complex performance features is often not realised until maturity.
Therefore, they tend to be more of a buy-and-hold investment decision rather than a means of getting in and out of a position with speed and efficiency.
ExchangeTradeNotes
Come into improve the liquidity in certain types of structured products.
Consist of a debt instrument with cash flows derived from the performance of an underlying asset.
Provide alternative to harder-to-access exposures such as commodity futures or Indian Stock Market.
Issuer’s Credit Quality Con
There is a risk with them as the products themselves are considered to be the issuing financial institution’s liabilities.
Pricing Transparency Cons
No uniform pricing standard, making it harder to compare the net-of-pricing attractiveness of alternative structured product offerings.
Hedge Fund
Collective investment vehicles admitting only a small number of wealthy individuals or institutions.
Free from many types of regulation designed to protect investors.
How do Hedge Funds Invest
Through a combination of investments, including derivatives, they try to hedge risk while seeking a high absolute return.
Now they take aggressive bets on the movement of currencies, equities, stock markets, IR, bonds around the world.
Frequently add to risk by borrowing multiple of the amount put in by the wealthy individuals or institutions, or use derivatives to lever up the return and risk.
Freedom from Regulation
Confined to not investing in particular classes of security or to particular investment methods.
Free to short (selling shares they don’t have in expectation of buying them back at a lower price)
Borrow over 10 times the size of the fund to take a punt on small markets in currency rates
Where do HFs sit on the Risk Return Scale?
Impossible to state where hedge funds are as some are managed by relatively safe managers and some are on the complete other end of the spectrum.
LAck of transparency for investors because they don’t know where their money will be used.
