629:
underlying debt and collateral and then paid back based upon the capital structure of the security, whether it be in relation to mortgages and real estate, or any other debt products that can be financed in this way. Securitized products also provide a huge source of financing in economies and funds more than 50% of US household debt. The securitization process follows a waterfall model which is divided into tranches and pays investors based upon the level of riskiness their investments hold. Securities with lower risk are usually paid first and are considered investment grade investors which invest in bonds that usually have a “AAA rating” with subprime securities having lower credit ratings such as “BBB”.
207:, or to utilize the current market trend. From the issuer's point of view, structuring means that a number of existing financial products are combined to achieve the client's desired return function. Theoretically an investor can do this themselves, but the cost and transaction volume requirements of many options and swaps are beyond many individual investors. As such, structured products were created to meet specific needs that cannot be met from the standardized financial instruments available in the markets. The more outlandish the idea and with less time to play out, the cheaper pricing will naturally be (see
653:
significantly lowering interest rates. More significantly, bonds and the credit market react this way due to being contra-cyclical with interest rate decreases having the opposite effect on bond prices. In recent times however, in order to control extremely high levels of inflation, the fed has raised interest rates leading to the price of the bond market and structured notes falling significantly, as well as the formulation of a much higher rate of
521:, they perform an economic function by enabling the risk averse to transfer risk to those who are willing to bear it for a fee. At the same time, there are several risks associated with many structured products, especially those that present risks of loss of principal due to market movements, are similar to risks involved with options. Disadvantages of structured products may include:
652:
In light of the COVID-19 pandemic, structured products saw a major increase in their prices including products such as
Commercial Mortgage-backed securities, Residential Mortgage-backed securities, Collateralized loan obligations, and other esoteric asset backed securities due to the federal reserve
454:
Historically, this aspiration is met with an ad hoc approach: the structure of the product is postulated in a way that seems appropriate for the client. Within this approach it can be difficult to articulate the precise problem the product is designed to solve, let alone to claim the product as
628:
which relates to the management of leverage and the risk and serves as a very large source of financing across economies around the world. Securitized products such as
Mortgage-backed securities allow investors to get paid from principal and interest cash flows which are usually collected from
290:
under certain circumstances. In exchange for the potential for a higher return (if the equity value would increase and the bond could be converted at a profit), investors would accept lower interest rates in the meantime. However, the worth of this tradeoff is debatable, as the movement of the
572:(FINRA) suggests that firms "consider" whether purchasers of some or all structured products should be required to go through a similar approval process, so that only accounts approved for options trading would also be approved for some or all structured products.
305:, or principal protection. These extra features were all strategies investors could perform themselves using options and other derivatives, except that they were prepackaged as one product. The goal was again to give investors more reasons to accept a lower
640:
technique so that a separate company is created in which the securitized debt in formed as a limited liability venture, so it can carry large mortgages with varying levels of riskiness without having to deploy this capital on their own
234:') with another entity (e.g. a bank) that pays out the full return on the given stock, but only if the stock surpasses a specified threshold, such as this 20%, over a specified time period. This product is known as a
257:
that has sufficient interest to grow to $ 100 after the five-year period. This bond might cost $ 80 today and after five years it will grow to $ 100. With the remaining funds, the issuer purchases the
621:
in relation to structured products is the undertaking and pooling of bundles of debt which may include commercial mortgages, residential mortgages, and other debt obligations such as credit cards.
355:
Structured product business, as a key part of customer-driven derivatives business, has changed dramatically in recent years. Its modern setup requires a comprehensive understanding of:
152:. Structured products are not homogeneous — there are numerous varieties of derivatives and underlying assets — but they can be classified under the aside categories. Typically, a
171:(SEC) Rule 434 (regarding certain prospectus deliveries) defines structured securities as "securities whose cash flow characteristics depend upon one or more indices or that have
230:
a 20 percent rise in the stock would cause. Therefore, the investor chooses to purchase a structured product on the stock instead: an agreement ('contract', 'certificate', '
541:
Highly complex – the complexity of the return calculations means that it is difficult to determine how the structured product would perform versus simply owning the
407:
Structured product manufacture process, and the "derivatives business" value chain - i.e. linking trading, structuring, quantitative modelling and risk management
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784:
599:
605:
A Quantitative framework in order to assess the risk-reward profile of structured products based on probability theory was developed by
Marcello Minenna.
561:
Lack of clarity on what exact problem the product is actually solving (does not apply to products built through the
Quantitative Structuring approach).
1027:
569:
568:
More generally, the serious risks in options trading are well-established and customers must be explicitly approved for options trading. The U.S.
168:
96:
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Ability to minimize issuer risk by using collateral secured instruments (COSIs) backed with collateral in the form of securities or cash deposits
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function, which offers protection of principal if held to maturity. For example, an investor invests $ 100, the issuer simply invests in a
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Lack of transparency on pricing - the investment bank fees are hidden in the product pricing and difficult for the customer to discern
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to be derived as a mathematically optimal solution to the clients' needs. This approach demands higher proficiency from both the
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in the United States; they may only be insured by the issuer, and thus could potentially lose the principal if there is a
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587:. Some firms attempted to create a new market for structured products that are no longer trading; some have traded in
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then decided to add features to the basic convertible bond, such as increased income in exchange for limits on the
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forwards or options or securities where an investor's investment return and the issuer's payment obligations are
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602:, which prohibits issuing and trading equity derivatives that do not trade on a nationally recognized exchange.
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246:, and current market expectations of such returns happening over such timespans given the agreed constraints.
59:
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on debt in exchange for certain features. On the other hand, the goal for investment banks was to increase
637:
538:– structured products are primarily traded over the counter and issuers are not obligated to provide a bid
313:
since the newer products with added features were harder to value, and thus harder to gauge bank profits.
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Structured products aspire to provide investors with highly targeted investments tied to their specific
394:
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A more advanced mathematical approach to product design has been proposed. It allows the structure of
368:
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The regulatory framework for structured products is hazy and they may fall in legal grey areas. In
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Reduced volatility (or risk) within an investment (depending on the type of structured product)
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Prevailing regulatory environment, specifically existing and forthcoming regulations including
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to investors like asset managers, hedge funds, and investment banks who buy these products.
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550:-based methods of product design often produce trades that are mathematically equivalent to
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427:, return requirements and market expectations. Benefits of structured products may include:
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200:
199:; structured products can be used as an alternative to a direct investment, as part of the
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63:
1028:"Structured Finance Special Purpose Vehicles and FinCEN's CDD Rule | White & Case LLP"
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757:
Structured
Derivatives: A Handbook of Structuring, Pricing & Investor Applications
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183:, changes in the value of underlying assets, indices, interest rates or cash flows".
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952:"A Quantitative Framework to Assess the Risk-Reward Profile of Non Equity Products"
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Enhanced returns within an investment (depending on the type of structured product)
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17:
238:. Numerous combinations of conditions and assets are available to construct this,
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Ability to earn a positive return in low-yield or flat equity market environments
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141:
966:"A Quantitative risk-based approach to the transparency on Non Equity Products"
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who designs the product, and the client who needs to understand the proposal.
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for the client. Nevertheless, this approach is still widely used in practice.
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477:. This involves replicating the product through a trading strategy involving
547:
379:
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Structured investments arose from the needs of companies that want to issue
208:
404:
Structured product payoff features and their risk characteristics, as above
195:'s point of view, the concept of structuring means customizing a specified
1090:
1070:
558:"Quantitative Structuring approach" can be used to eliminate this problem)
332:
enhancement products). Structured products are also available at the mass
913:
Soklakov, Andrei N. (December 2016). "Elasticity Theory of
Structuring".
845:
760:
551:
360:
348:, sell investments on these to their customers; these are referred to as
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Once the product is designed, it is manufactured through the process of
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Further, "principal-protected" products are not always insured by the
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The market for derivatives has grown quickly in recent years because,
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254:
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Interest in these investments has been growing in recent years, and
836:
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and structure these products, the securitization process employs a
785:"Packaged Retail and Insurance-Based Investment Products (PRIIPs)"
595:
302:
265:
needed to perform whatever the investment strategy calls for. See
383:
279:
1100:
826:
Soklakov, Andrei N. (2015). "Why
Quantitative Structuring?".
968:. Consob - The Italian Securities and Exchange Commission.
160:" to design and manage its structured-product offering.
1085:
1004:"What Are Tranches? Definition, Meaning, and Examples"
980:"Features of a Cash Flow Waterfall in Project Finance"
800:
Manufacturing and
Managing Customer-Driven Derivatives
598:, equity-related structured products may violate the
282:
more cheaply. This could have been done by issuing a
226:
and does not want to hold it in their portfolio, but
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1134:
555:
239:
1076:Structured Products Information for the UK market
438:Tax-efficient access to fully taxable investments
328:represent the other end of the product spectrum (
1061:Investopedia - Understanding Structured Products
320:investors now use structured products as way of
244:based on past likelihoods and actual occurrences
324:. Nowadays the product range is very wide, and
291:company's equity value could be unpredictable.
877:"Wall St. Redux: Arcane Names Hiding Big Risk"
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819:
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435:(depending on the type of structured product)
8:
497:as well as simple derivatives like vanilla
249:A feature of some structured products is a
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1105:
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410:Structured product distribution channels,
835:
745:, U.S. Securities and Exchange Commission
1093:, Euromoney Institutional Investor Group
1086:European Structured Products Association
1056:Structured Product Guides and Education
936:"Another 'Safe' Bet Leaves Many Burned"
735:
570:Financial Industry Regulatory Authority
286:—i.e., debt that could be converted to
169:U.S. Securities and Exchange Commission
97:Constant proportion portfolio insurance
29:
591:for as low as pennies on the dollar.
577:Federal Deposit Insurance Corporation
203:process to reduce risk exposure of a
7:
1066:Structured Products Association (US)
91:Constant proportion debt obligations
875:Nathaniel Popper (April 18, 2013).
1209:Collateralized mortgage obligation
1081:UK Structured Products Association
600:Securities Contract Regulation Act
25:
901:"Structured Notes: Buyer Beware!"
27:Pre-packaged investment strategy
1227:Collateralized fund obligation
1221:Collateralized loan obligation
1215:Collateralized bond obligation
1203:Collateralized debt obligation
1091:Structured Retail Products Ltd
419:Product design and manufacture
376:capital/liquidity requirements
326:reverse convertible securities
1:
743:"Regulation C – Registration"
37:Structured Product Categories
1071:Structured Products magazine
518:
432:
391:quantitative pricing models
156:will employ a specialized "
144:, debt issuance or foreign
128:strategy based on a single
74:inverse floating rate notes
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1144:Securitization transaction
984:Mazars Financial Modelling
707:Inverse floating rate note
624:It is under the branch of
528:– structured products are
242:, and the pricing is then
148:, and to a lesser extent,
132:, a basket of securities,
81:-linked notes and deposits
43:Interest rate-linked notes
33:
374:Principles of risk-based
322:portfolio diversification
224:dislikes a specific stock
1186:Mortgage-backed security
395:multi-curve environments
119:market-linked investment
638:special purpose vehicle
414:, impact of e-platforms
1264:Management cybernetics
787:. European Commission.
755:Mehraj Mattoo (1996).
431:Principal protection,
336:level—particularly in
1180:Asset-backed security
648:COVID-19 Implications
532:from investment banks
475:financial engineering
399:volatility smile/skew
228:knows how much regret
846:10.2139/ssrn.2639383
677:Derivative (finance)
481:instruments such as
121:, is a pre-packaged
55:Exchange-traded note
1233:Senior stretch loan
1197:Credit default swap
1173:Types of securities
940:Wall Street Journal
251:principal guarantee
181:highly sensitive to
103:Market-linked notes
85:Credit-linked notes
70:Floating rate notes
49:Equity-linked notes
31:
18:Structured products
1259:Structured finance
1238:Structured product
1149:Credit enhancement
1128:Structured finance
828:Introductory Paper
717:Market-linked note
712:Credit-linked note
702:Floating rate note
697:Equity-linked note
687:Structured finance
682:Exotic derivatives
626:structured finance
609:Structural Process
464:financial products
236:market-linked note
164:Formal definitions
123:structured finance
117:, also known as a
115:structured product
66:notes and deposits
30:
1246:
1245:
1192:Credit derivative
1034:. 22 October 2019
1032:www.whitecase.com
809:978-1-118-63262-8
797:Qu, Dong (2016).
672:Credit derivative
589:secondary markets
536:Lack of liquidity
507:forward contracts
340:, where national
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16:(Redirected from
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1036:. Retrieved
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1011:. Retrieved
1008:Investopedia
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987:. Retrieved
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632:In order to
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346:supermarkets
342:post offices
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222:An investor
214:Two typical
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105:and deposits
87:and deposits
51:and deposits
45:and deposits
36:
35:
667:Accumulator
526:Credit risk
495:commodities
369:PRIIPs-KIDs
344:, and even
150:derivatives
142:commodities
1253:Categories
1038:2022-10-11
1013:2022-10-11
989:2022-10-11
837:1507.07219
759:. London:
730:References
724:Structurer
585:bankruptcy
479:underlying
468:structurer
389:Real-life
158:structurer
146:currencies
126:investment
917:: 81–86.
886:April 19,
854:154120135
803:. Wiley.
634:originate
556:the above
548:Intuition
380:Basel III
240:see below
216:use cases
209:moneyness
205:portfolio
191:From the
761:FT Press
661:See also
552:gambling
519:as above
433:as above
361:MiFID II
193:investor
173:embedded
130:security
1154:Tranche
923:2262963
862:2639383
499:options
491:indices
457:optimal
301:of the
259:options
187:Utility
138:indices
134:options
93:(CPDOs)
921:
860:
852:
807:
767:
487:shares
401:, etc.
386:, etc.
371:, etc.
350:PRIIPs
338:Europe
334:retail
288:equity
274:Origin
99:(CPPI)
79:Hybrid
1229:(CFO)
1223:(CLO)
1217:(CBO)
1211:(CMO)
1205:(CDO)
1199:(CDS)
1188:(MBS)
1182:(ABS)
850:S2CID
832:arXiv
655:yield
596:India
513:Risks
503:swaps
483:bonds
330:yield
303:stock
263:swaps
179:, or
72:and
919:SSRN
915:Risk
888:2013
858:SSRN
805:ISBN
765:ISBN
505:and
384:FRTB
280:debt
261:and
232:note
154:desk
62:and
842:doi
583:or
554:. (
365:KYC
211:).
1255::
1030:.
1006:.
982:.
938:,
879:.
856:.
848:.
840:.
830:.
816:^
763:.
509:.
501:,
493:,
489:,
485:,
397:,
382:,
367:,
363:,
352:.
218::
140:,
136:,
113:A
60:FX
1120:e
1113:t
1106:v
1041:.
1016:.
992:.
925:.
890:.
864:.
844::
834::
811:.
773:.
269:.
20:)
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