Explore Everything You Need to Know About Structured Products

Make sure you explore everything you need to know about structured products so that your money can make even more money for you.

Securities that correlate with their value and the performance of an index, underlying asset, or product are called as structured products. These could be a combination of market indexes, currencies, interest rates, individual stocks, securities, and commodities, or bundles of these.

Owing to their enormous diversity, structured products lack a standard definition or method for calculating risk and reward.

Everything You Need to Know About Structured Products

"Options," a sort of derivative product that can grant investors the right to purchase or sell anything at a predetermined price (referred to as the "Strike Price") and date, are typically included in the majority of structured products. Offering a financial institution permission to purchase from or sell to the investor at a set price might also be part of it.

The right to purchase the underlying asset at a specific price is granted to the option holder in a "call" option. The option holder with a "put" option is entitled to sell the asset in question at a specific price.

Structured Product Types

Structured notes and structured deposits are the two main types of structured assets available in Singapore.

Structured Deposits

They usually consist of an option component and a zero-coupon bond. Zero-coupon bonds are bought at a discount (for instance, 80% of their maturity value), yet they don't pay a coupon. An option to purchase the structured deposit's underlying asset is obtained with the remaining value, in this case, 20%. View the example in the section below.

For instance, a zero-coupon bond can be bought for 80% of its maturity value rather than receiving a standard coupon. It will reimburse the entire amount invested at maturity. Because options can be purchased in any market or security using this idea, structured deposits come in a variety of forms.

When an investment matures, some supplying financial institutions may choose to purchase options in the underlying securities, asset, or index with the proceeds, or they may retain the investment gains in reserve deposits.

A structured deposit could make use of many "reference entities" at the foundation, such as:

• Stock baskets
• One or more exchange-traded funds and stock market indexes
• Currency
• Rates of interest

You will get your enhanced return if your assessment of the underlying benchmark entity's market is accurate. If, however, your market perception of the underlying is incorrect, you will get your principal back with no gains. As a result, the interest you would have otherwise earned on a fixed deposit would be lost. Additionally, if the market value of the structured deposit is less than the principal, early withdrawal of the deposit before its maturity date may result in a loss.

Moreover, unlike fixed deposits, structured deposits are not protected by the Singapore Deposit Insurance Corporation. As such, having faith in the trustworthiness of the financial institution that approved the structured deposit is essential.

Organized Notes

Unlike structured deposits, which have a guarantee of principal payout in the event of the issuer of the structured note defaults, structured notes do not have that protection.

There is no one-size-fits-all explanation of how structured notes operate due to their great variability in the market. However, they usually involve options: the investor grants the issuer the right to call or put securities on the underlying asset or security, and on the structured note, the provider either purchases or sells an option on it.

There are three main categories for structured notes:

The performance of an underlying financial asset, such as stocks, credit spreads, interest rates, market indexes, securities with fixed income, foreign exchange, or a combination of these, determines the return on Participating Notes (P-Notes). P-Notes are only advised for investors who have the right level of risk appetite because they include significant hazards.

Notes on Yield Enhancement: Should the underlying financial instrument perform as anticipated; you could receive an increased yield. Yield enhancement notes are only advised for investors with the right risk appetite because they include considerable risks.

Notes with a Minimum Principal Redemption at Maturity: If the notes are kept until maturity, they offer a minimum to get back your principle. Additionally, there's a chance you'll get a higher yield or get to see how the underlying financial item performs.

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