It is stated that in traditional asset classes, structured products can be used as an alternative to direct investment , particularly in markets where direct access is restricted. For example, when a market is closed to foreign investors, structured products may be the only way to replicate that market ‘s output, without investing directly in that market’s securities.

Please note that generally, the kick-in point is 20 to 30 percent below the price of the underlying stock on the date of issue. In terms of form, a reverse convertible bond consists of a bond providing the annual interest payments (if any) and the par value at maturity; and a signed put option (i.e. the holder buys a put option), offering the securities at maturity instead of the par value if the kick-in price is infringed.

It is to be acknowledged that a discount certificate has the same risk-return profile as a reverse conversion, except that it is uniquely configured. A discount certificate allows investors to participate up to a pre-determined maximum point in the performance of the underlying stock, called the “price-strike” or simply “limit.” The drug is being sold at a discount to counter the caped upside.

Please learn that both reverse convertible bonds and discount certificates offer capped upside potential with no defense against downside. We share the same risk-return characteristics, though somewhat different in form. Discount certificates are formed when two different types of choices are combined. (Transaction costs will decrease actual product returns.)

Please note that “Leverage” (also known as “gearing”) refers to methods used to improve the future return rate. These strategies include margin lending, the use of derivatives for price differential lending, and borrowing money for trade. Know it works both ways. Although “leverage” increases gains, it magnifies losses, too. Most derivative contracts are leveraged, or geared, by design.

Future contracts are sold on a spread, i.e. buyers only have to put up a fraction of the contract’s value to enjoy the full price appreciation, or suffer the full price decline. Margin investing is analogous to equity lending, where the lender borrows from the broker in essence. Interest on margin accounts is paid, which affects overall returns on investment.

Please learn that diversification is the solution to concentration risk. Diversification, sadly, isn’t easy for an individual investor alone. For example, to diversify one’s equity portfolio it takes considerable resources to study and review the universe of stocks. For this reason, the traditional advice is to invest in diversified unit trusts for individual investors.

It is to be acknowledged that when one security’s price moves up or down, the other security’s price moves in the same direction, by the same amount. A coefficient of -1 means that the two securities are in complete agreement with each other. When one security’s price price goes up or down, the other security’s price shifts in the opposite direction, by the same percentage.

It is stated that unless the correspondence is 0, the securities movements have no correlation; they are completely random. Perfectly correlated securities are infrequent in real life. Also within the same sector, individual stock prices are in some degree linked because they are subject to common market risk factors but in complete equilibrium they do not go up and down.

To ensure liquidity, in the case of ETNs and certificates, SGX requires that at least 75 percent of the securities be spread out to at least 100 investors. For ETFs, the size of the fund must be at least S$20 million, and at least 25 percent of the total number of issued shares of the fund, excluding treasury shares, must be held by at least 50 public shareholders (100 for a venture capital fund).

It is to be acknowledged that a CIS is a pooled investment mechanism in which individual investors invest in a mutual fund, and a qualified investment manager manages 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”).

Please learn that investors have three basic investment goals, namely principal safety, investment income stability and capital appreciation potential. Furthermore, if need arises, investors want to be able to convert their investments into cash at a reasonable price. Although liquidity is not directly linked to return on investment, it is still necessary and logical expectation.

It is stated that advisors should assist clients in determining their investment goals based on their personal circumstances and risk appetites. The pool of organized goods is large enough to suit most health, revenue, and growth targets combinations. However, most structured products are not liquid and it’s difficult to determine the “fair” market value.

It is to be acknowledged that structured products are very complex. The extent to which the customers understand the products depends on their investment experience and financial literacy level. It is difficult for customers, for example, to grasp the workings of structured products without prior experience with derivatives.

Please note that in advising the clients with little investment experience or financial knowledge, Advisers should take extra steps in assessing the clients’ understanding of the recommended products before implementing the recommendation. Financial institutions should have internal policies and procedures in place to guide their Advisers on the steps to take when dealing with inexperienced clients.

It is stated that financial institutions are required to train their Advisers on the features and risk-return profile of any investment products that they recommend. Although the financial institutions have the duty to provide the training, the responsibility of product knowledge resides with the Advisers. All financial products have trade-offs between risk and return. Advisers should present products in a balanced way, highlighting the benefits, as well as the risks.

Please learn that two scenarios for yield enhancement types of engineered products should be outlined as follows: (a) the best-case scenario in which the underlying outperforms and the return to the consumer is restricted to the cap-strike level, and (b) the worst-case scenario in which the underlying outperforms and the consumer loses a portion or all of its principal value. This is especially important when customers are opting for such products as an alternative to traditional fixed-income investments.

Please note that there is no such thing as financial investment outside the economy. They have affected market outlook and general economic conditions. Given the global connectivity that exists today, it is not only domestic conditions that affect market prices, but also the global environment. Factors like interest rates , inflation, exchange rates, commodity prices and others may cause price fluctuations because they have a direct impact on profitability.

Regulatory action or restriction may also preclude a counterparty from performing its obligations. Because investment returns from structured products are predominantly backed by derivative contracts, failure by counterparties to meet their commitments results in losses to investors in the structured products. There are two ways of mitigating risk to the counterparty.

One way of mitigation is to make use of publicly traded derivatives. When the transaction takes place on an exchange, the counterparty risk is reduced as the exchange offers the assurance that contractual obligations are met through the central clearing party principle. Note that there is still a risk that even though the risk may be low the exchange itself may default. For non-publicly traded derivatives products , i.e. over the counter ( OTC), it is becoming increasingly common to require counterparties to put up collateral to support the promises.

It is to be acknowledged that payment netting is commonly used to reduce the risk of counterparties for both OTC and traded exchange products. Payment netting minimizes the need for funds and securities to change hands, maximizing the likelihood that each party will receive what it is supposed to get at the end of the day.

It is stated that in each investment transaction there are two components, namely the principal invested, and the investment return generated. The investment purpose is to maximize return while preserving the principal. An aggressive investor might be willing to do so at the risk of losing all or part of its principal. A more cautious investor may be willing to accept a lower return to protect its principal

Please note that as all other structured goods, an unsecured debt instrument is an inverse convertible bond. This is published as a note of which a single stock is associated. In normal circumstances, it has characteristics of a fixed income instrument: regular interest payments (if the note so provides), and payment of the note’s par value upon maturity.

It is stated that usually, there is no need to include fixed income instruments for the main component of those products without any downside security factor in participation products. Alternatively, derivatives contracts are used to achieve the optimal risk-return pattern for both the principal and return elements. Within this group, there are several examples of the products.

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

Bonus certificates are tracker certificates with the pre-determined barrier conditional downside defense. These are built to give protection to the downside only at barrier point. So long as the price of the underlying asset does not fall below the threshold, the payout on maturity to the buyer is no less than an negotiated sum (the “bonus”).

Please learn that the benefit of an airbag certificate over a bonus certificate is that it gives the underlying stock an opportunity to recover over the certificate ‘s lifespan. Airbag certificates may be configured to have various rates of airbags to match the specific risk tolerance of an individual. The higher the level of security, of course, the lower the risk for return.

It is to be acknowledged that structured products that aim to preserve capital typically use bonds as the underlying structure to provide return of all or part of capital at maturityThere are various ways of obtaining the same risk-return profiles using different financial instruments. Reverse convertible is designed by bonding and placing option.

Please note that although the types of financial instruments used differ greatly depending on investment goals, structured products aimed at retaining capital usually use bonds as the underlying mechanism to return all or part of capital at maturity. Discount certificate is created using the call method and down-and-out.

Please note that futures were initially traded on goods only, in a market dominated by the Chicago Mercantile Exchange ( CME). Nevertheless, contracts on financial instruments became immensely popular after their launch in the 1970s and rapidly overtook commodity futures in terms of trading volume and global market accessibility. There are two basic asset categories, for which there will be future contracts. These are  Commodity futures contracts; and  Financial futures contracts.