These are derivatives which give the holder the right to buy the underlying instrument at a given price before a certain time.
... they are opaque and complex structures not generally suited to the retail investor who does not understand the complex derivative instruments and pricing mechanisms underneath these products.
The value of a call option is expressed in the following equation – PN(d1) - EXe-rtfN(d2) – so it is no wonder the head of the regulator has recently criticised structured products as “spread bets on steroids”. Although perhaps a tad overzealous it is pretty close to the mark.
There is an increasing interest in behavioural finance and the fact that investors tend to act irrationally and focus on headline terms which sound and feel superficially appealing.
In the main structured products are sold by lazy advisers who are able to use the behavioural/emotional appeal of a ‘guarantee’ to push them onto clients – the banks have sold these products in vast volumes as they are an easy sale and historically paid large up front commissions. In fact they are opaque and complex structures not generally suited to the retail investor who does not understand the complex derivative instruments and pricing mechanisms underneath these products.
In summary most structured products can be classified as products for the few wealthy and sophisticated clients who really can afford to lose every penny and not be impacted.
Alan Smith is chief executive at Capital Asset Management