Definition of structured products

Structured products are financial instruments that are typically created by investment banks and sold to investors by financial advisors or brokers.

They are designed to provide investors with exposure to a specific underlying asset or basket of assets, while also offering some level of protection or enhanced returns. Structured products can take many different forms, including bonds, derivatives, and other types of securities, and they are typically customized to meet the specific needs of individual investors.

At their most basic, structured products are simply financial instruments that are created by combining different elements in a structured manner. This can include a combination of cash and derivatives, for example, or a combination of debt and equity. The key characteristic of structured products is that they are customized to meet the specific needs of individual investors, rather than being standardized products that are available to all investors.

There are many different types of structured products, and they are often classified based on the underlying assets that they are tied to. For example, structured products can be tied to stocks, bonds, commodities, currencies, or other financial instruments. They can also be tied to indices or other market benchmarks, such as the S&P 500 or the NASDAQ Composite Index.

One common type of structured product is a bond with an embedded derivative. This type of product combines a traditional bond with a derivative instrument, such as an option or a futures contract.

The derivative component of the structured product allows the investor to gain exposure to the underlying asset, while the bond component provides a fixed stream of income.

Another common type of structured product is a structured note. Structured notes are typically issued by investment banks and are designed to offer investors exposure to a specific underlying asset or basket of assets. They may offer investors a fixed return, or they may be tied to the performance of the underlying asset.

There are also structured products that are tied to hedge fund strategies, such as long/short equity or market neutral strategies. These products allow investors to gain exposure to hedge fund strategies without actually investing in a hedge fund.

One of the main benefits of structured products is that they can be customized to meet the specific needs of individual investors.

This can include tailoring the product to meet specific risk tolerance or investment objectives, or structuring the product in a way that provides enhanced returns or protection against market volatility.

However, structured products also have some potential drawbacks. They can be complex and difficult for investors to understand, and they may carry higher fees than more traditional financial instruments. In addition, the value of structured products can be difficult to determine, as they are often tied to the performance of underlying assets or market benchmarks that may be hard to predict.

In order to fully understand the potential risks and benefits of structured products, it is important for investors to carefully consider the underlying assets and the terms of the product. For example, investors should consider the creditworthiness of the issuer, the nature of the underlying assets, and the terms of the product, including the potential for early redemption or other fees.

It is also important for investors to be aware of the potential risks associated with structured products. These products may be subject to market risk, credit risk, and other types of risk, and the value of the product may fluctuate based on the performance of the underlying assets. In addition, structured products may be more susceptible to liquidity risk, as they may not be as easily traded as more traditional financial instruments.

Overall, structured products are a type of financial instrument that can offer investors exposure to a specific underlying asset or basket of assets, while also offering some level of protection or enhanced returns.

They can be a useful tool for investors looking to customize their investment portfolios to meet their specific needs, but it is important for investors to carefully consider the potential risks and costs associated