Structured Products

What this video covers

• What a structured product actually is: a pre-packaged investment combining a traditional bond or note with one or more derivatives, typically options
• How principal-protected notes use a participation rate to cap upside, and why protection only applies at maturity and depends entirely on issuer creditworthiness
• Why reverse convertibles pay higher coupons, and what happens to principal when the reference asset breaches the barrier level (also called the knock-in level)
• The mechanical auto-call feature of auto-callable notes, and why upside is strictly limited to the contingent coupon amount
• The four overarching risks: liquidity risk, complexity risk, capped upside, and hidden costs embedded in the issuance price
• Why structured products carry issuer credit risk identical to exchange-traded notes (ETNs), and why the Lehman Brothers collapse destroyed supposedly principal-protected notes
• How structured products differ from direct investment across upside potential, downside protection, liquidity, transparency, fees, and credit risk
• The suitability and disclosure obligations an adviser must meet before recommending these products, and why FINRA and the Securities and Exchange Commission (SEC) have issued investor alerts