US Capital Markets

Structured Financial Products

Over the past few years, in order to answer the growing demand from sophisticated investors, banks and large financial institutions have developed a wide variety of what are called, “structured financial products.”

These products are designed to allow investors to implement complex investment strategies with only one purchase. This field of investment is expanding very quickly, and every year the variety of structured financial products grows.

In this chapter, we will present two types of structured products:

  1. Structured Deposits.
  2. Structured Bonds.

Structured Deposits

A structured deposit is one where the interest it produces is dependent on a specific financial variable.  For example, this can be a stock index, an interest rate, or an exchange rate.

Every structured deposit has two important characteristics:

  1. The deposited principal is guaranteed.  The depositor receives his deposit back in full at the end of the deposit period.
  2. The interest that is paid is dependent on a financial variable, and the relation between that variable and the interest is defined when the deposit is made. Some may refer to it as a “bonus” (instead of interest).

 

 

Here is a simple example of a structured deposit that will help explain how they work.

Example 1

A Deposit with Variable Interest According to the DJIA

 

Deposit Conditions

  • Minimal Deposit:  $5,000.
  • Deposit Period:  6 Months.
  • The deposit is guaranteed and will be returned at the end of the deposit period.
  • The interest will be calculated as follows:

50% of the DJIA’s gain. For example, if the Dow rises by 16% over the course of the deposit’s six months, the interest rate will be 8%.

Note:  If over the course of the half year, the DJIA should fall, no interest will be paid, but the principal will be returned in full.


The Advantages of Structured Products

From this example, a few of the advantages of structures are already clear.

  1. Exposure to additional profit while minimizing risk.
  2. Guaranteed return of original investment.
  3. An alternative to independently designing an investment strategy.

 

Additional Examples

Example 2

A Deposit With Variable Interest According to the LIBOR

The LIBOR rate is an accepted base rate for loans across the world.  A detailed explanation of the LIBOR rate appears at the continuation.

Deposit Conditions

  • Minimal Deposit:  $1,000.
  • Deposit Period:  12 Months.
  • The deposit is guaranteed and will be returned at the end of the deposit period.
  • The interest will be calculated as follows:
  1. 4% annual rate, for every day that the LIBOR is between 1% and 5%.
  2. 0% annually, for every day that the LIBOR is outside of that range.

No matter what happens, the deposit itself will be returned at the end of the year, in its entirety.

Example 3

A Deposit with Variable Interest According to the Euro.

 

Deposit Conditions

  • Minimal Deposit:  $50,000.
  • Deposit Period:  24 Months.
  • The deposit is guaranteed and will be returned at the end of the deposit period.
  • The interest will be calculated as follows:
  1. 10% annually, for every day that the Euro is traded between $1.2 and $1.4. 
  2. 2% annually, for every day that the euro is outside that range.

 

Structured Financial Products554  Structured Financial Products