Structured Products

Structure products are pre-packaged investments based on derivatives, such as a single security, a basket of securities, options, indices, commodities, debt issuance and/or foreign currencies, and to a lesser extent, swaps. Many feature a "capital guarantee", which offers protection of the original investment sum if held to maturity, say over a 5 year period.

For example, if an investor invests £100, the issuer simply invests in a risk free bond 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 leftover funds the issuer purchases the options and swaps needed to perform whatever the investment strategy is. Theoretically an investor can just do this themselves, but the costs and transaction volume requirements of many options and swaps are beyond many individual investors.

Structured products can be used as an alternative to a direct investment, as part of the asset allocation process to reduce risk exposure of a portfolio, or to utilise the current market trend.