Please note that a derivative contract is a deferred delivery deal where its value depends on certain underlying properties, or is derived from them. The manager of a derivative contract does not own the properties that underlie it. Use home buying as an example is a derivative contract being an option to buy a flat. You pay for the right to buy the flat a fraction of the price of the flat, You will not own the apartment though until years later when you pay the purchase balance.

Please learn that underlying price movements. For example, if an investor anticipates that a certain stock’s price will go up over a certain time period, rather than a direct investment in that stock, he may purchase an option on that stock. Because option price is only a fraction of the stock’s cost, the potential benefit from option is several times that from direct investment, if “bet” is proved to be correct.

Structured products, called “wrappers” can be produced and sold in various formats. One potential wrapper in the form of unsecured debenture, i.e. a bond, is the equity-linked bond outlined above. Others still exist. Wrapper preference depends on a number of factors including regulatory constraints on issuers, the required investment flexibility, the required degree of accountability (e.g. structured fund requires independent valuation with a periodically reported Net Asset Valuation (NAV)), the expected level of returns (e.g. some type is more costly than others); and tax consideration in a specific jurisdiction.

Please note that most investment funds in Singapore are organized as trusts while foreign domiciled funds are usually organized as corporations. In the case of a fund established as a trust, there is an independent trustee ensuring that the working of the fund manager is in compliance with the trust contract and the investment policy. A similar role exists for the board of directors and/or the depositary bank for funds structured as corporations.

It is stated that for any investment transaction there are two elements, namely the principal invested, and the return on investment generated. Investment intent is to optimize returns, while preserving the principal. An enthusiastic investor may be able to do so at the risk of losing all or a part of its principal. A more conservative investor may be able to accept a lower return to safeguard his principal.

It is to be acknowledged that the speculators also use derivative contracts as directional bets of the underlying price movement. For example , if an investor anticipates that a certain stock’s price will go up over a certain time period, rather than direct investment in that stock, he may purchase an option on that stock.

It is to be acknowledged that a commodity swap is a transaction in which the price of a commodity or the price of a commodity index decides one set of payments. The most popular examples of commodity swaps include plain vanilla OTC arrangements for a fixed-for-floating risk exchange, in which no physical commodity is supplied.

Please learn that a commodity swap is a contract in which the price of a commodity or the price of a commodity index decides one set of payments. Many consumers and commodity producers use commodity swaps to hedge price hikes over a long period of time. For example, bread makers hedge prices for grain, while shipping companies hedge prices for fuel.

It is to be acknowledged that financial products are not classified universally. Traditional investments like CIS and ILPs can be classified in various ways: by geographic focus; by asset class; by maturity; etc. Structured products can also be classified differently, e.g. by underlying asset classes; by risk-return profiles; or by investment goals.

Please learn that products for yield enhancement are riskier with higher yield potential compared to products aimed at preserving capital, as a larger portion of investments is intended to deliver upside potential. Participation goods are the most volatile of the three because they provide no downside insurance at all; all the investments are placed into output pursuance.

Please learn that in the finance realm, the risk is about uncertainty. If an investment is considered to be of high risk, it means that the probability of the expected return that might not be achieved is greater than other investments. This also means the principal can be lost in whole or in part. Of course, investors are seeking fair compensation for the risk they take on.

It is to be acknowledged that investors are seeking fair compensation for the risk they take on naturally. This is why investors expect higher returns from risky investments, i.e. to offset the greater probability this returns may not materialise. This does not, however, mean that all risky investments have the potential for high returns

Please note that structured goods are flexible in the sense that they can be related to single or multiple securities, in any asset class or combination, of short or long durations, denominated in any currency, offering a maximum or no return on capital. It is therefore easy to understand why there is a wide range of structured products, traded both on and off the exchange.

It is to be acknowledged that barrier option is the alternative used in the Certificates of the barrier. Under this option, the exercise option depends on reaching or attaining the underlying assets at a specified barrier. This form of choice has four combinations i.e. Up-and-out,Down-and-out, Up-and-in and Down-and-in.

It is stated that the barrier alternative is included in the Certificates of the Barrier. Under this option, the exercise option depends on reaching or attaining the underlying assets at a specified barrier. Up-and-out: the spot price begins below the barrier level and has to travel upwards to the barrier level for the knock-out option (i.e. is null and void).

It is to be acknowledged that a swaption is an option offering the right to enter into a swap agreement underlying it. Generally, the term “swaption” applies to interest rate swap options, though any form of swap can be used.

Please note that without any aspect of downside security in participation goods, usually, the key part of these items does not need to include fixed income instruments. Instead, derivatives contracts are used to achieve the optimal risk-return pattern for both the principal and return components.

It is to be acknowledged that a certificate tracker monitors the performance of an underlying asset. It has neither an upside limit, nor defense against downside. It has an equivalent risk profile to the underlying asset it monitors. The explanation for its creation is to give investors access to otherwise unlikely or economically viable investments, such as a tailored-made index.

Please note that two types of bonds exist, namely senior and subordinated bonds. In the event of liquidation, senior bond holders have precedence over shareholdings and subordinated bonds. On the other hand, compensation for subordinated bonds takes place after all other higher-priority creditors have been compensated. Subordinated bonds therefore typically have a lower credit rating than senior bonds.

It is stated that it is possible to list structured notes and the structured funds. There are a variety of structured notes listed under the Exchange-Traded Notes (ETNs) and Certificates categories on the Singapore Exchange (SGX). Listed structured funds come under the common Exchange-Traded Funds (ETFs) umbrella. Keep in mind that the ETFs are not all structured funds.

Please note that goods identified in Singapore are subject to SGX supervision. In determining the eligibility to list of a structured product, SGX considers the credibility of the financial institutions issuing the securities, their financial power, and the liquidity of the proposed listed securities. To ensure liquidity, SGX requires that at least 75% of the securities must be spread out to a minimum of 100 investors in the case of ETNs and certificates.

It is to be acknowledged that a CIS is a pooled investment vehicle in which individual investors invest in a common fund, and a professional investment manager directs the fund’s investments and day to day operations. A Standardized Fund is a CIS and must comply with the CIS regulatory requirements, in particular the MAS-issued CIS Code (the “Code”).

It is stated that at third-party custodian such as a trustee owns the assets of a CIS. Thus, investors in structured funds do not need to worry about the product-issuer ‘s credit risk, although they are still subject to the credit risk of CIS investments. By comparison, investors in structured deposits and structured bonds, in the event of bankruptcy, are general creditors of financial institutions that issue the goods.

Please note that classification of financial products is not universal. It is possible to classify traditional investments such as CIS and ILPs in a number of ways: by geographical focus; by asset class; by maturity; etc. Structured products can also be categorized in different ways, e.g. by underlying asset classes; by risk-return profiles; or by investment objectives.

Please learn that structured products that are based on their investment goals goods designed to preserve capital conform to their risk levels; yield enhancement products; and value participation products. For example, there are structured deposits based on equities or currencies designed to preserve capital; structured notes linked to capital stocks or bonds intended to preserve capital, and structured funds or ILPs aimed at preserving capital.

It is stated that for the principal component a zero-coupon bond is typically used. The underlying aspect is most commonly a single stock, a stock basket, or an index. Some examples of these products include structured deposits; equity or credit-linked notes to the degree that the product’s fixed income portion is designed to yield capital returns; and guaranteed capital funds. However, protection against disadvantages is only as good as the creditworthiness of the protective party.

It is to be acknowledged that all reverse convertible bonds and discount certificates give minimal upside potential without insurance against downside. We share the same risk-return characteristics, though somewhat different in form. Discount certificates are structured when two different types of options are combined. (Transaction costs can decrease actual product returns.)

It is stated that a “disaster” happens at the barrier stage with a bonus award, when the insurance from price loss is knocked out. Like an automobile driver in a car accident, an investor might want some protection from these disastrous situations. An airbag certificate was created to reduce the impact of knock-outs and extend downside protection to a predetermined level of airbags.

It is to be acknowledged that investors have three basic investment objectives, namely principal protection, investment income stability and capital appreciation potential. Furthermore, Investor needs to be able to convert their savings to cash at a fair price, if need arises. While liquidity is not directly related to return on investment, it is nevertheless important consideration and reasonable expectation.

Please learn that determining suitability begins with knowing your client-their investment goals, risk appetite, time horizon, financial position, knowledge of investment, and experience. The second step is for the Consultant to know the goods under consideration so that the product attributes and risk factors can be explained to the consumer in a way that he can understand.