In this course, you've discussed a lot of different financial instruments.
Stocks, bonds, derivatives and a lot of different investment strategies.
Hedge funds, actively managed fund, index fund, passive funds.
A structured product is actually an investment package.
It combines various financial instruments, or actually it tries to replicate
the payoff, the terminal payoff associated with the particular investment strategy.
But in fact, what a structured product
is is simply a contract between an investor and a provider.
This provider could be a bank or a specialized institution,
a derivatives firm, typically we're going to call it a bank in this short video.
And this bank is promising a particular payment at a particular date,
so this looks a lot like a derivative but it contains many different elements.
Typically, a structured product is a combination of stocks derivative and
fixed income, or bond like security.
Let's start with an example of a particularly popular structured product,
which is called a principal protected note.
The example we're going to look at is a principal protected
bull note more on this in just a minute.
So this financial instrument is a contract which promises the maximum
between two payoff at the pre-defined maturity.
It's like a bond where you get a promise of receiving your reimbursement at
maturity, plus some interest payment.
And in addition in some particular condition is fulfilled,
you participate in a performance of another financial security.
For example,
this additional payment could be linked to the performance of a stock index.
Let's say I promise you as a bank
to give you a 2% return on the money invested in the product.
This is the minimum guarantee and if the S&P 500 is above its current
level I promise you 50% of the performance of the S&P 500.
In addition to the promised guaranteed the 2% return,
so this is a structured product.
And you see that there are different pay off situations which depend on
the underlying, the stock index in this case, on the underlying performance.
So let's look at the situation at maturity for an investor in such a product,
when we look at the pay off profile- what happens to the wealth invested?
Depending on the performance of the underlying security and
let's say that the underlying security is a stock index.