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How to Invest in Structured Products: A Guide for Investors and Asset Managers

ISBN: 978-0-470-68487-0
384 pages
November 2009
How to Invest in Structured Products: A Guide for Investors and Asset Managers (0470684879) cover image
This book is essential in understanding, investing and risk managing the holy grail of investments - structured products. The book begins by introducing structured products by way of a basic guide so that readers will be able to understand a payoff graphic, read a termsheet or assess a payoff formula, before moving on to the key asset classes and their peculiarities. Readers will then move on to the more advanced subjects such as structured products construction and behaviour during their lifetime. It also explains how to avoid important pitfalls in products across all asset classes, pitfalls that have led to huge losses over recent years, including detailed coverage of counterparty risk, the fall of Lehman Brothers and other key aspects of the financial crisis related to structured products. The second part of the book presents an original approach to implementing structured products in a portfolio.

Key features include:

  • A comprehensive list of factors an investor needs to take into consideration before investing. This makes it a great help to any buyer of structured products;
  • Unbiased advice on product investments across several asset classes: equities, fixed income, foreign exchange and commodities;
  • Guidance on how to implement structured products in a portfolio context;
  • A comprehensive questionnaire that will help investors to define their own investment preferences, allowing for a greater precision when facing investment decisions;
  • An original approach determining the typical distribution of returns for major product types, essential for product classification and optimal portfolio implementation purposes;
  • Written in a fresh, clear and understandable style, with many figures illustrating the products and very little mathematics.

This book will enable you to better comprehend the use of structured products in everyday banking, quickly analyzing a product, assessing which of your clients it suits, and recognizing its major pitfalls. You will be able to see the added value versus the cost of a product and if the payoff is compatible with the market expectations.

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Disclaimer.

Foreword.

Acknowledgements.

Goal of this book.

Who should be interested.

Content summary.

Part I Individual Structured Products.

1 Introduction.

2 Generalities About Structured Products.

2.1 A Definition by Analogy.

2.2 Buyers, Sellers and Reasons for Investing in Structured Products.

2.3 Reading a Payoff Diagram.

2.4 Reading a Payoff Formula.

2.5 Reading a Term-Sheet.

3 The Categories of Structured Products.

3.1 Capital Guaranteed Products.

3.2 Yield Enhancement.

3.3 Participation.

4 Behavior of Structured Products During their Lifetime.

4.1 Main Valuation and Risk Measures.

4.2 Capital Guarantee.

4.3 Yield Enhancement.

4.4 Participation Products.

4.5 Other Participation Products.

5 Common Special Features of Structured Products.

5.1 Quanto Options.

5.2 Barrier Options.

5.3 Autocall and Callable Options.

5.4 Rolling Products and Products Without Fixed Maturity.

5.5 Conditional and Accumulating Coupons.

6 Functionality Options of Structured Products.

6.1 Physical or Cash Delivery with Equity-Based Products.

6.2 Clean Price and Dirty Price.

6.3 Lending Values.

6.4 Issue Minimum/Maximum Size and Liquidity.

6.5 Funding Rates and Counterparty/Credit Risk.

7 Foreign Exchange, Fixed Income and Commodity Products.

7.1 FX-Based Structures.

7.2 Fixed Income Structures.

7.3 Commodity Structures.

8 Recent Developments.

8.1 Customized Index Products.

8.2 Actively Managed Certificates.

8.3 Electronic Trading Platforms.

Part II Structured Products in a Portfolio Context.

9 Introduction to Part II.

10 Classical Theory and Structured Products.

10.1 Distribution of Returns Shapes.

10.2 Classical Portfolio Management Theories.

10.3 Classical Theory and Structured Products.

10.4 Conclusion.

11 Structured Solution Proposal.

11.1 Preferred Distribution of Return Investment Process.

11.2 Distribution Classes: The Return Distribution Cube.

11.3 An Investor’s Utility (Value) Curve.

11.4 Questionnaire.

12 Return Distributions of Structured Products.

12.1 Procedure and Data.

12.2 Capital Guaranteed Products.

12.3 Yield Enhancement Products.

12.4 Participation Products.

12.5 Conclusion: Product Classification.

13 Structured Portfolio Construction.

13.1 Portfolio Construction Process.

13.2 Constructing a Structured Product Portfolio in Theory.

13.3 Preferred Return Distribution Process Versus Classic Portfolio Management.

13.4 Investor Portfolios.

14 Final Words.

Appendix A: Glossary of Terms.

Appendix B: Distribution of Returns: An Intuitive Explanation.

Appendix C: Questionnaire.

Appendix D: List of Figures.

Appendix E: List of Tables.

Appendix F: Index Information.

Appendix G: Issuer and Product-Related Websites.

Bibliography.

Index.

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ANDREAS BLÜMKE is Head of Structured Products at VP Bank. He obtained a degree in economics, option business management, from the HEC University of Lausanne in 1992. He became a Certified International Investment Analyst (CIIA) in 2000. Before starting a banking career, he was a commodity trader from 1992 to 1995, working for Continental France in Toulouse as a soft-seed trader, and later at Deustche Conti in Hamburg as edible oil trader. He began his banking activities at UBS AG in 1996 in Zürich, where he briefly traded bonds and bond futures, before he joined Cantrade Privatbank AG in 1997 to trade OTC options. Shortly after, he created and built the structured products desk. As the structured products business expanded successfully, he managed a team of up to 6 people, including an Advisory desk. Cantrade subsequently became Ehinger & Armand von Ernst AG, and was acquired by Julius Baer AG in 2006.

He is married with two children, and fluent in French, German and English. Structured products have been his passion for the last 12 years.

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