World of Structured Products.
The reference book for Structured Products.
Despite stormy times, the structured products industry has continued to develop. The transparency efforts on the part of the SSPA – Swiss Structured Products Association – represent a central point. The SSPA Swiss Derivative Map published by the association has provided an overview of the most important product types since 2006. Together with the latest map, the third edition of the work «World of Structured Products», which was published in cooperation with the Swiss Derivative Institute, has now been published.
The launch of the SSPA Swiss Derivative Map© coincides with the new edition of «Inside Structured Products – The Book Associated with the SSPA Swiss Derivative Map©». The book features a number of new additions and adaptations. Part of the Swiss Products Association’s (SSPA) campaign for spreading knowledge, the written work presents both a comprehensive overview and an expert introduction into the world of Structured Products. In light of the positive response to the first edition, the content has been expanded and enhanced. In addition to adaptations to the latest Map, there is a stronger focus on real-life applications.
The book for the SSPA Swiss Derivative Map© addresses a wide audience, from newcomers to financial experts. It enables every reader to better understand Structured Products and their properties through detailed descriptions of the most widely known product types, objective discussion of opportunities and risks, as well as, a comprehensive overview of the individual components.
Structured Products are, often inaccurately, prejudged as obscure speculation securities. However, one thing is certain that Structured Products have a clearly defined payoff profile at the time of issue and at expiry. Furthermore, most strategies (with the exception of leverage products) have a lower level of market risk than e.g. shares. Structured Products are available in a variety of forms. This is the only way to be able to offer strategies which allow desired yields even during periods of low interest rates or sideways markets. Fees (excluding those for transactions and custody fees) are generally already included in the price and no further costs are incurred during maturity. There are exceptions, though, in the form of mini futures, tracker certificates and constant leverage certificates, whose construction does not allow for fees to be incorporated into the issue price.
The saying «there’s no such thing as a free lunch» is applicable to all financial products and Structured Products are no exception. Potential yields are foregone to finance the desired tailored strategy, be they dividends, interest or the opportunity to participate in rising prices. The investor also takes on an additional risk, as Structured Products are debt instruments. The bank being the issuer assumes the role of debtor and the investor is the creditor. In the event of issuer default, a large portion of the invested capital may be lost. In these circumstances, collateral secured certificates within the COSI© and TCM segment provide a possible solution.
The large variety of products has its advantages and disadvantages. This book assists in explaining the drawbacks and how to make use of the advantages. Investors should only buy products which they understand. They should be aware of the potential scenarios and of the impact the occurrence of a scenario can have on the investment.
Since its induction around 25 years ago, the market for Structured Products has stood out clearly through its commitment to self-regulation. With its risk and categorization committees, specialized training providers and numerous independent information portals, the SSPA offers knowledge, transparency and tools for investor protection. The book «Inside Structured Products – The Book Associated with the SSPA Swiss Derivative Map©» provides a comprehensive overview of the market for Structured Products and is recommended to anyone who is in contact with or wishes to invest in Structured Products on a day-to-day basis.
The Book Associated with the SSPA Swiss Derivative Map© is a joint venture involving the Swiss Structured Products Association, the Swiss Derivative Institute and Derivative Partners.
Table of contents
1 Introduction
2 The Market of Structured Products
- 2.1 History of derivatives and structured products
- 2.2 Definitions and scope
- 2.3 The four main advantages of structured products
- 2.3.1 Every individual market expectation can be replicated
- 2.3.2 For each individual investor profile, there is a suitable product
- 2.3.3 Acces to all asset classes
- 2.3.4 Highest level of liquidity and flexibility
- 2.4 Risks and disadvantages of structured products
- 2.4.1 Risks
- 2.4.2 Disadvantages
3 Components of Structured Products
- 3.1 Underlyings
- 3.1.1 Shares
- 3.1.2 Indices
- 3.1.3 Commodities
- 3.1.4 Foreign exchange
- 3.1.5 Money market, fixed income
- 3.1.6 Alternative underlyings
- 3.1.7 Dynamic strategies
- 3.2 Indexing
- 3.2.1 Introduction
- 3.2.1.1 Newcomer and top dogs
- 3.2.1.2 The first index step is the most difficult
- 3.2.1.3 The europeans’ race to catch-up
- 3.2.1.4 The three-factor model, the beginning of smart beta
- 3.2.2 Choice of indices
- 3.2.3 Customized indices
- 3.2.4 SIX Structured Products strategy indices
- 3.2.1 Introduction
- 3.3 Options
- 3.3.1 Classification of Options
- 3.3.2 Plain-Vanilla-Options
- 3.3.2.1 Intrinsic value and time value
- 3.3.2.2 Moneyness
- 3.3.2.3 Influencing factors on the value of the option – sensitivities
- 3.3.3 Theoretical pricing of options
- 3.3.3.1 The Single-period model
- 3.3.3.2 Binomial model
- 3.3.3.3 Black-Scholes model (B&S Model)
- 3.3.3.4 Monte Carlo simulation
- 3.3.4 Payoff Diagram
- 3.3.5 LEPO (Low Exercise Price Option)
- 3.3.6 Path-dependent options and path-independent options
- 3.3.7 Barrier options
- 3.3.8 Asian options
- 3.3.9 Lookback options
- 3.3.10 Multi-Asset options
- 3.3.11 Parisian options
- 3.3.12 Quanto options
- 3.3.13 Other exotic options
- 3.4 Zero Bonds
4 Static Option Strategies and the Put/Call Parity
- 4.1 Static options strategies
- 4.1.1 Bull and bear spread
- 4.1.2 Straddle/Strangle
- 4.1.3 Butterfly (Butterfly Spread)
- 4.1.4 Condor
- 4.2 Arbitrage strategies: Put/Call parity (Conversion)
- 4.2.1 Protective put
- 4.2.2 Covered call writing
- 4.2.3 Synthetic hedge of a protective put
- 4.2.4 Reverse convertible
5 Evaluation and Key Figures
- 5.1 Sensitivites
- 5.1.1 Delta
- 5.1.2 The Gamma
- 5.1.3 The Vega (the Kappa)
- 5.1.4 Theta
- 5.1.5 Leverage (Omega) and Gearing
- 5.1.6 The Rho
- 5.2 Yields
- 5.2.1 Maximum yield – total/p. a. in %
- 5.2.2 Sideways yield – total/p. a. in %
- 5.2.3 Bonus yield – total/p. a. in %
- 5.2.4 Discount – total/p. a. in %
- 5.3 The pricing of Structured Products
- 5.3.1 Volatility as a price-determining factor
- 5.3.2 Theoretical value (fair value) of a product
- 5.3.3 Costs
- 5.4 Liquidity
- 5.4.1 Price availability in %
- 5.4.2 Bid-ask spread in %
- 5.4.3 Volume on offer (bid/ask)
- 5.4.4 Investor sentiment (Buyback-Ratio)
- 5.4.5 Payoff Market Making Index (PMMI)
- 5.5 Key figures
- 5.5.1 SRI – Summary Risk Indicator
- 5.5.2 Difference between underlying and Knock-Out/Stop-Loss in %
- 5.5.3 Difference between underlying and barrier in %
- 5.5.4 Barrier hit probability in %
- 5.5.5 Intrinsic value
- 5.5.6 Fair value
- 5.5.7 Premium – total/p. a. in %
- 5.5.8 Break-even
- 5.5.9 Autocall probability
- 5.5.10 Issuercall probability
6 Players in the Market
- 6.1 The stock exchange and trading
- 6.1.1 SIX Swiss Exchange
- 6.1.2 BX Swiss
- 6.1.3 Swiss Dots
- 6.2 Trading and market making
- 6.3 The issuer
- 6.3.1 Issuer’s credit rating
- 6.3.2 COSI®
- 6.4 The lead manager and the co-lead manager
- 6.5 The investment manager and the asset manager
- 6.6 Regulator: FINMA (Swiss Financial Market Supervisory Authority)
- 6.7 Swiss Structural Products Association (SSPA)
- 6.8 The investors
7 Application of Structured Products
- 7.1 Product life cycle
- 7.1.1 Concept and construction
- 7.1.2 Primary market: subscription, marketing and settlement
- 7.1.3 Secondary market: trading
- 7.1.4 Expiry and settlement
- 7.2 Description of products and product reports
- 7.2.1 The term sheet
- 7.2.2 The product information sheet
- 7.2.3 Basic Information Document (BIB)
- 7.3 Hedging with Structured Products
- 7.3.1 Protection through Put Warrants (2100)
- 7.3.1.1 Statistic Delta-hedge
- 7.3.1.2 Dynamic Delta-hedge
- 7.3.2 Protection through Knock-Out Warrants (Put, 2200)
- 7.3.3 Protection through Mini Futures (Short, 2210)
- 7.3.4 Summary
- 7.3.1 Protection through Put Warrants (2100)
- 7.4 How to find the appropriate product
- 7.5 Life cycle management
- 7.6 Consideration within the portfolio context
8 Taxes and Fees
- 8.1 Types of taxation
- 8.2 Income tax
- 8.2.1 Transparent and intransparent products
- 8.2.2 Predominantly once-off interest-bearing product or periodically interest-bearing product (IUP vs. Non-IUP)
- 8.2.2.1 Products which are not predominantly once-off interest-bearing (non-IUP)
- 8.2.2.2 Products which are predominantly once-off interest-bearing (IUP)
- 8.3 871m
9 Product Categories and Product Types
- 9.1 The SSPA Swiss Derivative Map©
- 9.2 Capital protection products
- 9.3 Yield enhancement products
- 9.4 Participation products
- 9.5 Investment products with additional credit risk
- 9.6 Leverage products
10 Capital Protection Note with Participation
11 Capital Protection with Barrier
12 Capital Protection with Twin-Win
13 Capital Protection with Coupon
14 Discount Certificates
15 Barrier Discount Certificate
16 Reverse Convertible
17 Barrier Reverse Convertible
18 Conditional Coupon Reverse Convertible
19 Conditional Coupon Barrier Reverse Convertible
20 Tracker Certificate
21 Outperformance Certificate
22 Bonus Certificate
23 Bonus Outperformance Certificate
24 Twin-Win Certificate
25 Credit-Linked Note
26 Conditional Capital Protection Note with Additional Credit Risk
27 Yield Enhancement Certificate with Additional Credit Risk
28 Participation Certificate with Additional Credit Risk
29 Warrant
30 Spread Warrant
31 Warrant with Knock-Out
32 Mini-Future
33 Constant Leverage Certificate
Annex
- Tax Matrix
- Glossary
- Abbreviations Key Guide
