The best protection an investor can have on any kind of investment is knowledge on the different products and the risks that cling on to them. Some products can be very complex, just like Structured Products.
If you’ve seen the film “The Big Short”, structured products won’t be a strange, new entity for you. The film talks about the real-life housing crash in 2008 and the pivotal role of structured products in building the bubble. Before the financial crisis, global regulators were more lax in giving out structured products. After the crisis, they have focused more on creating safer environments for investors.
Being the world’s fourth largest financial district, it’s no surprise that there are a lot of different investment products available to you in Singapore. Part of your choices are Structured Products. But first, you must understand what they are and the risks involved.
What are Structured Products?
Structured Products are a mix of traditional financial instruments with one or more elements that utilize derivatives.
You can look at structured products as pre-packaged investments strategies. Some are based on options, commodities, currencies, a basket of securities, among many others. Some products have different conditions and functions – there are no single and uniform set of standards in these packages.
What are the risks involved in structured products
The risks linked to structured products are nearly the same risks that cling to options. In some countries, issuers are required to make interested buyers go through strict approval processes, given the risks involved in structured products.
Issuer default risk
Structured products are not regulated by centralised parties. This means that one part of the trade can default on its obligations. The issuer of the product can also become insolvent. This is why investors must pay close attention to the financial strength and reliability of a structured product issuer.
Uncollateralised product risk
Structured products do not have margin collateral. This means that in case of bankruptcy, investors can lose all of their invested money.
Structured products have expiry dates. After these dates, the issues become worthless.
Extraordinary price movements
This may also be called interconnection risk. Aside from relying on its underlying assets, structured products are also affected by external factors. As a result, price movements may be higher or lower the expected prices.
Foreign exchange risk
Currency rate fluctuations can immensely affect the value of a structured product’s underlying asset.
A liquidity provider must be present in order for the structured products to be issued. The role of the provider is to give quotes to run the trading of the products.
Complex payout structures
The mere fact that structured products are not standardised and have different conditions make them risky. This characteristic makes it hard for investors to study the specific product they are investing in.
The creditworthiness of an institution selling structured products must be taken into consideration. This risk exposes the buyer of the product to unsecured obligations of the institution.
If you invest in structured products, you are facing the risk of not getting paid or losing your investment if the institution who issued the product files for bankruptcy.
The underlying assets in structured products are greatly affected by a magnitude of factors. These things can directly affect the performance of structured products, and in turn, your gains or losses.
If you want to invest in structured products, you have to review its conditions. They differ from one another and some may not guarantee payouts for you.
Despite this long list of risks, people are still attracted to structured products because of the benefits they offer. Some structured products offer principal protection, enhanced returns, and reduced volatility. Plus, structured products allow investors to expose some of their money to markets they don’t have much exposure to. Some companies offer customised packages where in investors can note how much he is willing to risk for a specified reward. Ultimately, it is the investor’s responsibility to check every detail about the product institutions are offering.
Making structured products profitable require due diligence, the vow of learning the product and the market it participates in, a deep understanding of its underlying assets, the performance of the structured product itself, and your commitment to the purpose of your investment. It is advised that investors should only invest in instruments that they can handle when the worst case scenario happens.
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