What are structured notes?

Put simply a structured note is an I OWE YOUfrom an investment bank that uses derivatives (options) to create the desired exposure to one or more investments.

For example

You can have a structured note deriving its performance from the S&P 500 Price Index, the Emerging Market Price Index, or both. The combinations are almost limitless.

Advantages of Structured Notes?
Investment banks advertise that structured notes allow you to diversify your investment products and security types in addition to providing asset diversification.

Investment banks advertise that structured notes allow you to access access classesthat were previously only available to institutions or were hard for the average investor to access.

The only benefit is that structured notes can have customized payouts and exposures. Some notes advertise an investment return with little or no principal risk. Other notes offer a high return in range-bound markets with or without principal protections. Still other notes tout alternatives for generating higher yields in a low-return environment. Whatever your fancy, derivatives allow structured notes to align with any particular market or economic forecast. Additionally, the inherent leverage allows for returns being higher or lower than the underlying asset which it derives from. Of course, there must be trade-offs, since adding a benefit one place must decrease the benefit somewhere else. As you no doubt know, there is no such thing as a free lunch. And if there was such a thing, the investment banks certainly wouldn’t be sharing it with you.

What are structured notes? is a post from: Structured Notes