Fabian DePrey of RBC Capital Markets discusses how to use structured products to get capital protection, and looks at some of the issues and risks for investors to consider.
Date: Dec 2011
Tags: Structured products, Capital protection, Volatility, Credit risk
While the low interest-rate environment is a disadvantage, these products can be tailor-made. For example, for investors without a strong view, they could use products which will work well in sideways markets, said DePrey.
He said he has also been able to create a structure on gold which gave investors upside on the asset class while also providing a reasonable buffer on the downside.
Understanding capital protection
According to DePrey, capital protection is about getting your capital back at maturity.
Given that an investor’s capital is insured by a certain issuer, the investor has to take into account the issuer risk.
DePrey said that a lot of issuers who were previously seen as strong have recently faced a lot of credit exposure to Europe.
As a result, investors are coming back towards looking at the issuer’s credit rating in addition to reviewing the pricing on a transaction.
Considerations
When buying structured products, DePrey said investors need to understand what they are ultimately trying to achieve.
They then need to translate this into the underlying, pay-off, and the kind of risk they are happy to take. This is also linked to the issuer.
While investors weren’t really focused on the underlying previously, they are now going for safer, better-known underlyings which they would be more comfortable to hold.
In terms of pay-off, the trend is towards simplicity, given that complexity doesn’t necessarily mean a better yield. This is certainly the case for longer-term structures, explained DePrey.
