Structured products are financial instruments with a complex and versatile structure. They are usually structured to implement a certain investment strategy and may comprise several basic financial instruments in one. Components of a structured product can be derivative instruments based on shares, a group of shares, debt instruments, indices, options, futures, commodities and/or foreign currencies. Considering the diverse composition and structure of this instrument, there is no unambiguous and generally accepted definition. Usually they are created when traditional financial instruments and investment products can not meet the specific needs and expectations of investors. Structured products can be used as an alternative to direct investment as part of the process of strategic allocation of assets in an investment portfolio to minimize the risk. Very often structured products are issued for a fixed period of time. Some of them can incorporate a clause for protection of the deposited capital (capital protected).
First Investment Bank offers structured investment products in the form of bond or deposit. These investment products may combine risk-free investment for the amount of the investment with potential returns of investment in risk asset.
Risks related to structured products
Risks associated with structured products are mainly determined by the type the underlying assets included in their composition. Apart from the risks inherent to the underlying assets, there are also a number of specific risks that may arise due to the complexity and the versatile nature of structured products. They may include highly individualized features and clauses which to some extent are aimed to minimize the impact of some or cause other specific or general risks. Some of the risks are:
Liquidity risk - Depending on the form in which are proposed to the investment community (structured deposit, financial instrument, contract) it is possible their free transfer to third parties without the issuer’s participation. Most frequently, the secondary market for structured products is guaranteed by their issuer, although such obligation may not exist. However, it is possible a situation in which the secondary market of structured products is very limited and / or the difference between the best quotes “buy” and “sell” to be significant.
Credit risk - it is the possibility the issuer of the structured product to cease to perform its obligations assumed with the issue of the product. As a result, the investors may lose part or all of the investment.
Market risk or risk of the underlying asset /assets - Due to the complex and the versatile nature of the structured products many factors can affect the value of the assets involved. These factors depend on the underlying assets and can express the impact on the international currency markets, interest rates, the distribution (or not) of dividends, increased volatility in global markets and many others.
In addition to these risks it is possible that investors will be exposed to other adverse factors such as (but not limited to):
- Inability for reinvesting of withdrawals (at maturity or upon earlier closing of the investment) at a rate of return at least equal to or better than realized by the structured product.
- In the event of an early withdrawal of investment (before maturity, if any), it is possible that the investor will not receive the expected result from it or even incur losses.
- Depending on the place of registration, it is possible for investors to incur tax liabilities. Each investor should consult a qualified tax professional before investing.
- For some investors there may be legal constraints on the acquisition and disposal of such products. These limitations may result from the form or place of investor’s registration. It is recommended that all legal aspects to be consulted by a specialist.