How to Invest in Structured Products

This book is essential in understanding, investing and risk
managing the holy grail of investments - structured products. The
book begins by introducing structured products by way of a basic
guide so that readers will be able to understand a payoff graphic,
read a termsheet or assess a payoff formula, before moving on to
the key asset classes and their peculiarities. Readers will then
move on to the more advanced subjects such as structured products
construction and behaviour during their lifetime. It also explains
how to avoid important pitfalls in products across all asset
classes, pitfalls that have led to huge losses over recent years,
including detailed coverage of counterparty risk, the fall of
Lehman Brothers and other key aspects of the financial crisis
related to structured products. The second part of the book
presents an original approach to implementing structured products
in a portfolio.

Key features include:

• A comprehensive list of factors an investor needs to take into
  consideration before investing. This makes it a great help to any
  buyer of structured products;

• Unbiased advice on product investments across several asset
  classes: equities, fixed income, foreign exchange and
  commodities;

• Guidance on how to implement structured products in a portfolio
  context;

• A comprehensive questionnaire that will help investors to
  define their own investment preferences, allowing for a greater
  precision when facing investment decisions;

• An original approach determining the typical distribution of
  returns for major product types, essential for product
  classification and optimal portfolio implementation purposes;

• Written in a fresh, clear and understandable style, with many
  figures illustrating the products and very little mathematics.

This book will enable you to better comprehend the use of
structured products in everyday banking, quickly analyzing a
product, assessing which of your clients it suits, and recognizing
its major pitfalls. You will be able to see the added value versus
the cost of a product and if the payoff is compatible with the
market expectations.

Autorentext

ANDREAS BLÜMKE is Head of Structured Products at VP
Bank. He obtained a degree in economics, option business
management, from the HEC University of Lausanne in 1992. He became
a Certified International Investment Analyst (CIIA) in 2000. Before
starting a banking career, he was a commodity trader from 1992 to
1995, working for Continental France in Toulouse as a soft-seed
trader, and later at Deustche Conti in Hamburg as edible oil
trader. He began his banking activities at UBS AG in 1996 in
Zürich, where he briefly traded bonds and bond futures, before
he joined Cantrade Privatbank AG in 1997 to trade OTC options.
Shortly after, he created and built the structured products desk.
As the structured products business expanded successfully, he
managed a team of up to 6 people, including an Advisory desk.
Cantrade subsequently became Ehinger & Armand von Ernst AG, and
was acquired by Julius Baer AG in 2006.

He is married with two children, and fluent in French, German
and English. Structured products have been his passion for the last
12 years.

Zusammenfassung
This book is essential in understanding, investing and risk managing the holy grail of investments - structured products. The book begins by introducing structured products by way of a basic guide so that readers will be able to understand a payoff graphic, read a termsheet or assess a payoff formula, before moving on to the key asset classes and their peculiarities. Readers will then move on to the more advanced subjects such as structured products construction and behaviour during their lifetime. It also explains how to avoid important pitfalls in products across all asset classes, pitfalls that have led to huge losses over recent years, including detailed coverage of counterparty risk, the fall of Lehman Brothers and other key aspects of the financial crisis related to structured products. The second part of the book presents an original approach to implementing structured products in a portfolio. Key features include:

• A comprehensive list of factors an investor needs to take into consideration before investing. This makes it a great help to any buyer of structured products;
• Unbiased advice on product investments across several asset classes: equities, fixed income, foreign exchange and commodities;
• Guidance on how to implement structured products in a portfolio context;
• A comprehensive questionnaire that will help investors to define their own investment preferences, allowing for a greater precision when facing investment decisions;
• An original approach determining the typical distribution of returns for major product types, essential for product classification and optimal portfolio implementation purposes;
• Written in a fresh, clear and understandable style, with many figures illustrating the products and very little mathematics.
  This book will enable you to better comprehend the use of structured products in everyday banking, quickly analyzing a product, assessing which of your clients it suits, and recognizing its major pitfalls. You will be able to see the added value versus the cost of a product and if the payoff is compatible with the market expectations.

Inhalt

Disclaimer x

Foreword xi

Acknowledgements xiii

Goal of this book xv

Who should be interested xvii

Content summary xviii

Part I Individual Structured Products 1

1 Introduction 3

2 Generalities About Structured Products 7

2.1 A Definition by Analogy 7

2.2 Buyers, Sellers and Reasons for Investing in Structured Products 9

2.3 Reading a Payoff Diagram 14

2.4 Reading a Payoff Formula 16

2.5 Reading a Term-Sheet 19

3 The Categories of Structured Products 33

3.1 Capital Guaranteed Products 34

3.2 Yield Enhancement 43

3.3 Participation 53

4 Behavior of Structured Products During their Lifetime 71

4.1 Main Valuation and Risk Measures 71

4.2 Capital Guarantee 78

4.3 Yield Enhancement 88

4.4 Participation Products 98

4.5 Other Participation Products 108

5 Common Special Features of Structured Products 117

5.1 Quanto Options 117

5.2 Barrier Options 121

5.3 Autocall and Callable Options 124

5.4 Rolling Products and Products Without Fixed Maturity 134

5.5 Conditional and Accumulating Coupons 136

6 Functionality Options of Structured Products 139

6.1 Physical or Cash Delivery with Equity-Based Products 139

6.2 Clean Price and Dirty Price 140

6.3 Lending Values 140

6.4 Issue Minimum/Maximum Size and Liquidity 142

6.5 Funding Rates and Counterparty/Credit Risk 145

7 Foreign Exchange, Fixed Income and Commodity Products 151

7.1 FX-Based Structures 151

7.2 Fixed Income Structures 168

7.3 Commodity Structures 187

8 Recent Developments 207

8.1 Customized Index Products 207

8.2 Actively Managed Certificates 210

8.3 Electronic Trading Platforms 213

Part II Structured Products in a Portfolio Context 217

9 Introduction to Part II 219

10 Classical Theory and Structured Products 223

10.1 Distribution of Returns Shapes 223

10.2 Classical Portfolio Management Theories 227

10.3 Classical Theory and Structured Products 230

10.4 Conclusion 233

11 Structured Solution Proposal 235

11.1 Preferred Distribution of Return Investment Process 235

11.2 Distribution Classes: The Return Distribution Cube 238

11.3 An Investor's Utility (Value) Curve 240

11.4 Questionnaire 246

12 Return Distributions of Structured Products 259

12.1 Procedure and Data 259 …