Structured Products

Lesson

Structured products are complex financial instruments that combine various assets and derivatives to create a customized investment product. They are designed to meet specific investor needs, such as capital protection, income generation, or market exposure.

Practice Question #1

Which of the following structured products guarantees the return of the initial investment at maturity?

Terms

Structured Products:

Financial instruments that combine various assets and derivatives to create a customized investment product.

Principal-Protected Notes (PPNs):

A type of structured product that guarantees the return of the initial investment at maturity while offering potential returns based on the performance of an underlying asset.

Equity-Linked Notes (ELNs):

Structured products that provide returns based on the performance of an underlying equity or equity index.

Credit-Linked Notes (CLNs):

Structured products that provide returns based on the credit performance of an underlying reference entity or portfolio.

Commodity-Linked Notes (CoLNs):

Structured products that provide returns based on the performance of an underlying commodity or commodity index.

Interest Rate-Linked Notes (IRLNs):

Structured products that provide returns based on the performance of an underlying interest rate or interest rate index.

Currency-Linked Notes (CuLNs):

Structured products that provide returns based on the performance of an underlying currency or currency index.

Practice Question #2

What is the primary risk associated with investing in structured products?

Historical Example

In the early 2000s, structured products gained popularity as investors sought higher returns in a low-interest-rate environment. However, the financial crisis of 2008 exposed the risks associated with these complex instruments, as many investors suffered significant losses due to the collapse of the underlying assets and the failure of counterparties.

Practice Question #3

Which of the following is NOT a type of structured product?

Real-World Example

An investor who wants to protect their initial investment while gaining exposure to the stock market might consider purchasing a principal-protected note (PPN). The PPN guarantees the return of the initial investment at maturity while offering potential returns based on the performance of an underlying equity index, such as the S&P 500.