Structured products are specialised financial instruments designed to offer returns linked to the performance of underlying assets or indices, which might include stocks, bonds, commodities, currencies, or interest rates. Due to their broad range and customisation potential, structured products don’t have a universal definition or a standard way to calculate risk and potential returns. A common feature in many structured products is the inclusion of options, allowing either the buyer or the seller the right to buy or sell an asset at a specified price and date. For instance, a “call” option gives the right to buy an asset, while a “put” option provides the right to sell.
Two primary types of structured products exist in the Singapore market: structured deposits and structured notes.
Structured Deposits
These deposits generally involve two components: a zero-coupon bond purchased at a discount, and an option tied to the underlying asset. The bond pays back its full value at maturity, while the option component allows investors to benefit from favourable movements in specific assets. For example, if a structured deposit focuses on U.S. stocks, part of the investment might go into an option on the S&P 500 index. If the index increases in value, the option gains can be exercised, potentially enhancing the return. However, if the deposit’s underlying asset performs poorly, investors only receive their principal at maturity without any additional returns.
Structured deposits may include reference entities such as stock baskets, indices, currencies, or interest rates, which determine the investment’s performance. Unlike fixed deposits, structured deposits are not insured by the Singapore Deposit Insurance Corporation. Therefore, investors should consider the creditworthiness of the issuing institution, as early withdrawals or market declines could reduce the principal value.
Structured Notes
Structured notes differ from deposits in that they generally do not offer principal guarantees unless a third party backs them. Structured notes use options for market exposure, with the issuer holding the right to put or call the underlying securities. Structured notes fall into three categories:
- Participating Notes: These provide returns based on the performance of underlying assets, such as equities or market indices, carrying considerable risk.
- Yield Enhancement Notes: These notes allow for a potentially higher yield if the underlying asset performs as expected but also involve high risk.
- Minimum Redemption Notes: Investors in these notes are guaranteed a minimum return of their principal at maturity, along with potential additional returns tied to the underlying asset’s performance if held until maturity.
Structured products can offer attractive returns but carry varying degrees of risk, with capital protection depending on the product type and issuer. Investors need to assess their own risk tolerance and investment goals when considering these complex financial instruments.
Volta Finance Ltd (LON:VTA) is a closed-ended limited liability company registered in Guernsey. Volta’s investment objectives are to seek to preserve capital across the credit cycle and to provide a stable stream of income to its Shareholders through dividends that it expects to distribute on a quarterly basis.
