Creative Packaging of Derivatives, By Norbert Brinker- founder and CEO, Gift Group, october 2012

In an increasingly dynamic, competitive and uncertain market environment, investors are looking back nostalgically on the time when they could earn a positive return on so called safe investments such as government bonds. Structured products can provide an effective alternative to direct investments.
In an increasingly dynamic, competitive and uncertain market environment, investors are looking back ostalgically on the time when they could earn a positive return on so called safe investments such as government bonds. It seems that the safe heaven is not there anymore. Concern about the sovereign debt situation since 2007 as well as worries about the faltering economic growth world wide, keep on putting pressure on all financial markets. Parallel the poor management of the debt crisis leads to serious damage in consumer and business onfidence. This results in high volatility markets.
Structured products can provide an effective alternative to direct investments. There are generally two types of products, one offers income, the other growth. Income or return products offer higher rates than bank deposits but the investment amount is not guaranteed. With growth investments, the capital is usually guaranteed at the end of the term, growth however is not.
Capital protection products protect a predefined minimum return payment at maturity of the product on the initial capital invested. Depending on the product, this can be a 100% guarantee, although many products offer also less. In general the law is that the lower the protected capital amount, the higher the potential profit – and vice versa. Capital protected products are aimed at investors who expect the underlying asset to perform in a specific way, but who wants rotection in case it fails to do so.
Yield optimization products are aimed at investors, who expect markets to move sideways or rise or fall slightly, but who still look for a good return. Essentially, the loss risk on these products is the same as on the underlying securities. They are attractive proposition if, as expected, the underlying asset stagnates or moves only slightly within the relevant period. If this happens, investors will make significantly higher returns. The price paid for this advantage is a cap on potential profits.
Tracking type products permits investment in indices or stocks without the need to buy or sell the actual security. The big advantage of this product is that even with a relatively small initial investment amount, one can cost-effectively acquire a diversified investment. 
Leveraged products are suitable for investors who want high potential returns from a small capital outlay, and who are prepared to accept the possibility that the entire sum may be lost. The main products are equity warrants issued as call or put warrants, depending on the view of where the market might go.
Structured products can generate a good return even when markets are weak. They enable investors to exploit the special properties of derivative financial instruments even if they lack in-depth knowledge of the complicated derivative business. But they raise questions as well: How much higher a return has to be than a fixed rate of deposit by the same institution? Is it worth taking a risk for this extra income and, for example, choose a different issuer bank? Who protects the issue and how? Is it not to complicate to understand? What other investment has the potential of a similar return? Is there a currency risk?
Structured products have longer maturities than most alternative investments but a secondary market can be found for all solid structures today.
This increases their value as a tradable financial instrument available on a wide range of underlying basis ssets, even those assets that on investor cannot or will not purchase for his regular portfolio. This is even more the fact if these properties include protection for the invested capital.
In this respect, structured products are a sensible but logic addition to any
established portfolio.
 
 
*Written by Norbert Brinker- founder and CEO of the Gift Group, leading financial establishment, Specializing in Risk Management, tailor investment solutions, multi asset trading services and financial advisory. Gift has been active in global financial markets since 1983 and serves the markets most prominent client base under its different brands.

Disclaimer: This article including information contained in this disclaimer is given to you in strict confidence. By attending this presentation, you agree that no part of the presentation or disclaimer may be disclosed, distributed or reproduced to any third party without the consent of GIFT group. This presentation, including the information in this disclaimer, does not constitute an offer, invitation or recommendation to subscribe for or purchase any security and neither the presentation, disclaimer nor anything contained in them forms the basis of any contract or commitment. This article does not replace any consultancy and the use of any financial product requires suitability for a specific client. No representation, express or implied, is made to the fairness, accuracy, completeness or correctness of information contained in this presentation, including the accuracy, likelihood of achievement or reasonableness of any forecasts, prospects, returns or statements in relation to future matters contained in the presentation (“forward looking statements”). Such forward looking statements are by their nature subject to significant uncertainties and contingencies and are based upon a number of estimates and assumptions that are subject to change.
To the maximum extent permitted by law, neither GIFT nor its affiliates, directors, employees or agents, nor any other person accepts any liability including, without limitation, any liability arising from fault or negligence, for any loss arising from the use of this presentation or its contents or otherwise arising in connection with it.”