Section 0.3
Why these products exist
Essential question
What can a structured product really bring to a portfolio that a traditional investment (deposit, bond, equity) does not already provide? Once that role is identified, how do you know whether the proposed product is worth it?
A structured product is never an end in itself: it is an investment solution built to meet a specific need, where a simple instrument (deposit, bond, equity) would only partially cover the intended objective. Building a structured product always starts with formulating and understanding the need.
Behind the diversity of products, you almost always find one (or several) of five fundamental needs. Identifying the dominant need immediately points to the right product family, seen in the previous section.
Before the visualization, think it through
"I want a better return than my bank account"
A client says: "I want a better return than my bank account." Is that a sufficient objective for choosing a structured product? What is missing from this statement?
These are investor needs (the "why"), not to be confused with the five SSPA families seen in 0.2 (the "what": Capital Protection, Yield Enhancement, Participation, Credit-Linked, Leverage). The same need can be served by several families. Click on a need to see what the client is looking for, its natural benchmark and a concrete example.
Earn an attractive coupon in a market expected to be stable, slightly bullish or slightly declining. Crucial point: as a general rule, these products are not capital-protected. Protection mechanisms exist (low strike, European or American barrier), but when the underlying is a stock, the risk borne remains an equity risk, not a bond risk.
The absolute trap would be to compare a reverse convertible to a bond. The coupon is not lender's interest: it compensates for taking equity risk (you are in fact selling an option). The right reference is therefore the direct exposure to the underlying (holding the stock, or a yield strategy such as selling a put on that same underlying), not a bond.
An 8% Barrier Reverse Convertible on the SMI: reading it as "a bond paying 8%" is the classic mistake. Below the barrier, you absorb the SMI's decline; the true point of comparison is therefore exposure to the SMI, not a bond.
This is the most important reflex of the entire process of creating a structured product: it is not judged by its "sex appeal" (big coupon, high participation), but by its ability to do better than what the investor would obtain otherwise, for the same horizon and the same risk. This point of comparison is called the benchmark. If it is not beaten, the product has failed, even if it "returned something". Of course, the analysis must also take into account the potential reduction in the risk taken by the investor. The reverse convertible example speaks for itself: a capped gain, a capital loss similar to that of the underlying but with a lower probability of occurring thanks to the barrier.
A crucial nuance: "beating the benchmark" does not just mean "returning more". It is judged at comparable risk, and a product can also win by taking less risk than its benchmark. A reverse convertible with a low strike, for example, is less risky than holding the stock outright: you reduce the downside risk, but you also reduce the upside potential. The right product is not the one that promises the most, it is the one that offers the best risk / return profile in light of what the client is looking for.
The five needs above are realized at the product's maturity (final coupon, capital repaid, performance observed). But between purchase and maturity, the product has a market value that fluctuates: this is the mark-to-market (MtM). A product can perfectly meet the targeted need at maturity while displaying, during its life, a "frustrating" market value: it does not fully replicate the promise of the formula, which only holds at maturity.
Indeed, during its life, its price is driven by multiple factors that are not always easy to anticipate (the level of the underlying, volatility, interest rates, dividends, but also time remaining, the issuer's credit risk, correlation, etc.), which may not match the investor's intuition.
Identify the dominant need, the right point of comparison in this situation, and the main risk to explain to the client:
Key message
The structure follows the need, never the reverse. The real test is not 'is the product attractive?' but 'does it beat the benchmark the client would get otherwise, at comparable risk and horizon?' Without a named need and benchmark, no proposal is justifiable.
In practice, the same product often meets several needs at once. An autocall protects capital conditionally (protection), pays a coupon (yield) and redeems early if the market rises. You choose the family from the dominant need; secondary needs fine-tune the parameters (barrier, coupon frequency, maturity).
Question 1 / 4
A portfolio manager wants to expose their client to the global artificial intelligence theme without buying a basket of technology stocks themselves. Which fundamental need does this primarily illustrate?
Question 2 / 4
A client compares an 8% Barrier Reverse Convertible on the SMI to "a bond that would pay 8%". Why is this reasoning a trap?
Question 3 / 4
A family office reinvests a matured bond in a product in order to draw regular quarterly flows from it, without having to liquidate other portfolio positions. Which need does this case illustrate?
Question 4 / 4
A 100% capital-protected note over 5 years, with no coupon, offers 40% participation in the Eurostoxx 50. A bond from the issuer over 5 years pays 3% per year. What is the right way to judge this product?