Structured products have gained ground in 2024, especially in a situation of interest rates characterized by uncertainty and volatility. This trend is significantly linked to the context of interest rates. The current scenario has pushed investors to seek alternative investment opportunities that offer higher returns than traditional fixed income securities. Structured products, with their customizable payment structures and enhanced yield characteristics, have gained popularity. Furthermore, the interest rate landscape has raised concerns among investors about interest rate risk. Rate cut forecasts or changes in monetary policy have led investors to look for ways to mitigate this risk. Structured products, such as interest rate swaps or structured bonds, provide effective tools for managing interest rate risk, covering adverse rate fluctuations and ensuring favorable rates. In addition to risk management, the desire to preserve capital remains fundamental, especially in uncertain economic conditions. Investors are interested in safeguarding their capital while also seeking potential growth opportunities. Structured products offering capital protection, such as protected capital bonds, have generated interest as they allow investors to protect their capital while potentially benefiting from market gains, striking a balance between risk and return objectives. Additionally, in a low bond yield environment, investors are attracted to structured products offering higher returns through innovative payout structures and embedded derivatives. These products enable investors to achieve higher coupon rates or dividends compared to traditional fixed income securities, thereby improving portfolio returns and overall investment performance. The flexibility and customization offered by structured products have contributed to their popularity in the current interest rate environment. Investors are increasingly seeking tailor-made investment solutions aligned with their specific risk management objectives, return expectations, and market views. Structured products offer the flexibility necessary to design tailor-made solutions that effectively meet these requirements. Structured products are therefore financial instruments that combine elements of traditional securities, such as stocks or bonds, with derivatives to create customized investment opportunities based on investors’ specific needs. They are designed to offer a unique combination of risk and return profiles not typically found in standard investments. Some components and key features of structured products may include, for example:
Underlying assets: Structured products derive their value from one or more underlying assets, which can include stocks, bonds, commodities, currencies, or market indices. These underlying assets determine the performance and payouts of the structured product.
Derivatives: Structured products often incorporate derivatives such as options, swaps, or forwards to achieve specific risk or return objectives. Derivatives allow investors to customize the payoff structure of the product based on their market outlook and risk preferences.
Payoff structure: Structured products offer different payoff structures, from simple to complex. Common structures include capital-protected notes, reverse convertibles, and participation products. The payoff can be tied to the performance of the underlying assets, a predefined formula, or a combination of both.
Risk and return profile: Structured products can be designed to offer investors different risk and return profiles. Some products favor capital preservation with lower returns, while others offer potentially higher returns with increased risk exposure. The risk-return trade-off depends on the specific conditions and characteristics of the structured product.
Personalization: One of the key advantages of structured products is their flexibility and customization. Issuers can adjust the product parameters to meet investors’ investment objectives and risk tolerance. This customization allows investors to gain exposure to specific market outlooks or strategies that may not be easily available through traditional investments.
Issuer risk: Investors in structured products are exposed to issuer credit risk. In case of issuer default, investors may incur losses, especially if the product is not capital-protected. Therefore, it is essential to assess the issuer’s creditworthiness before investing in structured products.
Overall, structured products offer a versatile investment tool that can be used for various purposes, including capital protection, yield enhancement, or exposure to specific market themes. Structured products provide corporate treasuries with valuable tools to manage financial risks and optimize investment strategies:
Interest rate risk management: Corporate treasuries can use structured products such as interest rate swaps or structured bonds to hedge against interest rate fluctuations. These products allow locking in favorable rates or creating customized interest rate exposures based on their needs.
Currency risk hedging: Multinational corporations facing currency risk can use structured products such as currency forwards, options, or cross-currency swaps to hedge against adverse exchange rate fluctuations. These products enable treasuries to lock in exchange rates or create synthetic currency exposures to mitigate currency risk.
Capital protection: Structured products offering capital protection are suitable for corporate treasuries wishing to safeguard capital while also achieving higher returns than traditional fixed income securities. These products offer protection against downturns during market downturns while also participating in any potential upside.
Yield enhancement: Corporate treasuries can increase portfolio returns by investing in structured products with embedded derivatives offering higher coupon rates or dividends than standard fixed income securities. These products help optimize investment returns while managing risk within predefined parameters.
Liquidity management: Structured products, such as structured deposits or short-term notes, offer corporate treasuries alternative ways to manage short-term cash and optimize liquidity. These products provide attractive returns while maintaining liquidity and capital preservation, enabling efficient liquidity management and meeting financing requirements.
Risk diversification: Structured products enable treasuries to diversify investment portfolios beyond traditional asset classes, reducing concentration risk and improving overall portfolio diversification. By incorporating structured products with diverse underlying assets and payoff structures, treasuries achieve a balanced risk-return profile.
By effectively leveraging structured products, corporate treasuries can enhance risk management capabilities, optimize investment returns, and achieve financial goals in a dynamic market environment. Accurate analysis, risk assessment, and financial professionals’ advice are essential to ensure the suitability and effectiveness of structured product solutions for corporate treasury needs.
Some examples of structured products include:
Interest Rate Swaps, Currency Forward Contracts, Principal-Protected Notes, Enhanced Yield Structured Product, Commodity Price Swap, Credit Linked Note with Corporate and Government Bond underlying assets.
In conclusion, the trend for 2024 is clear: structured products are gaining ground as investment options for corporate treasuries, especially in response to the current interest rate environment. This trend is driven by the search for better returns, the need to manage interest rate risk, and the increasing demand for customized solutions. Consequently, we expect the adoption and use of structured products to continue growing throughout the year, with investors leveraging the unique characteristics of these instruments to optimize their portfolios and achieve their financial goals.
