In a simplified sense structured products is a comprehensive tool, the resulting combination of various financial assets. In most cases, as components of structured products use the fixed-income instruments and derivative financial instruments. Below, we give examples of the main components, we give their definition and decipher their meaning.
Instruments with fixed income (Fixed income)
This category includes financial instruments which are known in advance the timing and size of payments. Fixed income instruments are mostly low-risk and are popular among investors who expect a constant and guaranteed return investments. Depending on the release forms, payments on fixed income instruments may be carried out as a lump sum (at maturity) and for the entire life of the product (periodic interest payments).
This category of tools include:
deposits;
promissory notes;
Bonds:
coupon (generate income for the duration of treatment in the form of coupon payments);
zero-coupon (assume the entire lump sum amount of principal and interest);
credit default swaps (CDS) and their derivatives;
notes tied to loans, mortgages and other debt.
Known in advance the dates and amounts of payments allow the assessment of fixed-income instruments using flow discounting.
This method is mostly used for analysis, to determine when the value of the security instrument in future payments are discounted by the amount of interest.
Derivative financial instruments (Derivatives)
Derivative - term financial instrument price or the terms of which are based on the relevant parameters of another financial instrument (or instruments), which in this case base. The term "urgent" is coming, the future nature of the transaction. A distinctive feature of derivatives is that their combined cash equivalent does not necessarily coincide with the amount of the underlying instrument. Often, the issuers of the underlying asset is not relevant to the issue of derivatives.
INTERESTING FACT
Derivative instruments used in ancient Gretsii.Pervoe mention of them refers to the year 330 BC
For example, the total number of derivatives contracts on the company's shares may be several times the number of shares outstanding, with the company itself does not produce and does not trade in derivatives for its shares. This feature of derivatives can significantly increase liquidity, giving investors the opportunity to buy and sell assets at a relatively low price difference.
The derivative has the following characteristics:
cost changes following the change in the interest rate, the price of goods or securities, the exchange rate, index of prices or rates, credit rating or credit index, or other variable, which is the underlying asset;
for the purchase of derivatives, as a rule, need small initial investment compared with other instruments, the prices of which have a similar response to changes in market conditions;
changes in the cost function can be arbitrarily complex and nonlinear. It depends only on the risks that are willing to take on the parties involved in the transaction; derivative is urgent, ie the final calculations are made on it in the future.
In fact, the derivative is an agreement between the two parties, in which they undertake to transfer the right or the particular asset or sum of money by the due date or before the occurrence of the agreed price, if certain conditions stipulated in the contract in advance.
This category is quite a large number of financial instruments, so we consider only the most common examples.
Forward contracts (Forward)
Derivative financial instruments, under which one party (the seller) undertakes to transfer the goods opredelennyydogovorom term (underlying asset) to another party (the buyer) or execute an alternative monetary obligation, the buyer is obliged to accept and pay for the underlying asset, and (or) under the terms of which have counter parties having liabilities in the amount of which depends on the value of the indicator of the underlying asset at the time of fulfillment of the obligations in the manner and within the period or within the period specified by the contract.
Forward may be calculated or deliverable.
Current (Non-Deliverable) forward (Non Deliverable Forward) does not end with the delivery of the underlying asset, and leads only to a cash settlement between the parties.
Deliverable Forward (Deliverable Forward) ends with the delivery of the underlying asset, and full payment under the terms of the agreement.
EXAMPLE
Suppose you bought a share in the market of the company and at the price of 5 rubles. Buying shares is the acquisition of an appropriate share of ownership in a company A. In this case, your profit or loss will be determined by the fair market value of the company. Let's say one month the price of the shares rose to 10 rubles. If you now want to sell the stock, you can receive an income of 10 - 5 = 5 (rubles), and the right of ownership interest of company A will proceed directly to the buyer of this action.
But you can not wait a whole month, and to sell his share already more expensive now. To do this, you need to share with the buyer to make a bet - an agreement that he will buy your stock in three months for the price, for example, 8 rubles.
Such an agreement does not give the buyer any right to share right now, but in three months it will be able to buy a share at a price 8 rubles regardless of what will be at the time of its real market value. If after three months the market value of the shares will rise to 15 rubles - the buyer will profit: 15 - 8 = 7 (rubles) as buy stock at a price below fair market value.
If the stock price after three months will fall to 7 rubles, the loss of the buyer who concluded a contract with you will be: 8 - 7 = 1 (ruble). And only after the fulfillment of the terms of the contract and buy the stock three months the buyer will be its real owner.
This is the conclusion of the contract for the purchase of shares in the company and three months is an example of a forward contract or futures - the simplest type of derivatives. Of course, the purchase of derivatives and the seller makes a profit - he sells the stock at a price higher than the market at the moment, and the buyer - it acquires share at a price below the market forecast at the time of acquiring the rights to share. It is understood that the company A is taken as an example, any profit from the sale of derivatives does not, she does not even know of their existence.
Futures contract (Futures)
Standard Commodity Futures contract of sale of the underlying asset at the conclusion kotorogostorony (buyer and seller) agree only on the level of prices and delivery time. OstalnyeBazovye principles of structured products asset options (quantity, quality, packaging, labeling, and so on. N.) Pre-specified in the specification of the exchange contract. Parties have an obligation to exchange up to the execution of futures.
Futures is a variation of a forward contract.
Option (Option)
A contract under which the option buyer acquires the right (but not the obligation) to buy or sell an asset at a predetermined price at a certain point in the future treaty, or for a certain period of time. At the time of the contract the buyer is obliged to pay the seller a premium, which, in essence, is a price to pay for the right to conclude the deal in the future at a price fixed in the contract.
Perhaps the options - the component most often used in the creation of structured products. Therefore, in this chapter, we discuss in detail in the examination of this type of derivative financial instruments.
There are two main types of the option - to buy or sell the underlying asset:
call option (call) - an option to buy. It gives the buyer the right to buy the underlying asset;
a put option (put) - option to sell. It gives the buyer the right to sell the underlying asset.
Options are American or European. American option can be exercised on any day before the expiry of the option. That is, for this option is specified period during which the buyer can execute this option, demanding their right to buy or sell. European option can be exercised only in a specified date (the expiry date, date of Execu tion).
Using the options in the investment strategy provides a number of advantages. First, the options can be applied in speculative strategies and to hedge the risks of adverse price movements. Secondly, due to the effect of "leverage" options allow you to open compared to the purchase of shares of a similar classical largest item with much less investment. In case you have selected the correct trend direction this effect allows the investor to get a substantial benefit because the potential value of the option budetmenyatsya much faster than the quotation of the underlying asset.
Swap (Swap)
The agreement allows you to temporarily swap some assets or liabilities to other assets or liabilities. It is used to improve the structure of assets and liabilities, reducing the risk of profit.
Roll consists of two parts. The first part - when there is a primary exchange, the second part - when the reverse exchange (closing of the swap).
Currency Swap (Currency swap)
The combination of two opposite conversion transactions for the same amount with different value dates. With regard to the date of execution of a swap deal closer called the value date and the date of execution of a more distant date of the reverse transaction - completion date of the swap (maturity). Most of the transactions "currency swap" is a period of one year.
If Nearest date conversion transaction is buying the currency (usually the base), and more distant - selling the currency swap is called a "buy / sell» (buy and sell swap). If the first transaction is made on the sale of currency and the inverse transaction is a purchase of the currency, it will swap to "sell / buy» (sell and buy swap).
As a rule, the deal "currency swap" is performed with a single counterparty that is both conversion operations are carried out with the same bank. This so-called net swap (pure swap). However, you can call the swap combination of two opposite conversion transactions with different value dates by the same amount signed with different banks - it skonstruirovannyysvop (engineered swap).
Credit default swaps (Credit default swap, CDS)
Credit derivative or agreement under which the buyer makes a one-time or regular contributions (pay the premium) of the issuer CDS, who takes on the obligation to repay the loan granted by the Purchaser to third parties in case of failure to repay the loan by the debtor (the default of a third party). The customer receives a security - a kind of insurance issued before the loan or purchased debt. In case of default the Buyer will give issuers of debt securities (credit agreement, bonds, bills), and in exchange will receive from the Issuer the payment of the debt, plus any remaining until maturity of the interest.
At its core, credit default swaps are insurance against default on separately taken the contract or instrument.
Interest rate swap (Interest rate swap)
An agreement between two parties to exchange interest payments on a specific, pre-agreed notional amount. That is one side of a particular date to pay the other party a fixed percentage of a certain amount and receive a payment of interest at a floating rate (for example, at a rate of LIBOR) from the second side. In practice, such payments are netted, and one party pays the difference of the above payments.
The most common transaction exchange:
fixed rate for a fixed (fixed for fixed);
a fixed rate to a floating (fixed for floating);
floating rate to a fixed (floating for fixed).
It should be noted that some of the components simultaneously act fixed income and derivatives. For example, credit default swap (CDS) is a pro-derivative financial instrument, bringing investors to known returns.
Having reviewed the frequently used components, let us turn to the example of the establishment and functioning of the simplest structured product. In the Russian market the most common structured notes tied to the index stocks (equitylinked note).
Terms and conditions of the instrument can be as follows. The investor is investing $ 100 thousand. Rubles in a structured product with reference to the increase in the RTS index for one god.Dopustim, it selects the least risky product with a 100 per cent return on equity (100% capital protection). Then, by the end of the year back klientpoluchit invested 100 thousand. Rubles, and in the case of favorable market movements during this period - and even a premium. This premium is calculated by multiplying the dynamics of the RTS index by a factor of participation (participation factor). If the RTS index for the year increased by 30% and the participation rate was 40%, the investor will receive as a result of the award of $ 12 thousand. Rubles (100,000 × 30% × 40%), and the total amount of payments totaling 112 thousand . rubles.
If the RTS index for the year showed a negative trend has not changed or, at the end of the term of the product to the client will be paid only the guaranteed amount (100 thousand. Rubles).
By investing in such a tool, the client receives a financial product with a lack of potential losses, the potential income that is tied to the dynamics of the stock index. Thus, the investor achieves the goal of capital protection by diversifying investments.
Consider the internal structure of this type of structured products.
Of course, when buying structured products or the design of similar potokovsobstvennymi forces investors need to consider a number of factors that affect their valuation principles parametry.Osnovnye fixed income and options we have considered vdannom chapter should now mention some properties of the participation rate.
The participation rate positively depends on the interest rate (the higher the interest rate on deposits and bonds, the more funds will be for the purchase of options that provide greater potential yield).
The same can be said about the validity of the product: by increasing the period of operation to create structured notes reduced the amount invested in fixed income instruments. Therefore the investor the opportunity to buy more options.
At the same time it should be noted that the growth factors such as interest rate (r) and the validity of the product (t), increases the value of the option, which can be seen from the previously given formula Black-Scholes option pricing model:
C = S N (d1) - Ke-rtN (d2), where
d1 = [ln (S / K) + (r + σ2 / 2) × t] / [σ × √ (t)];
d2 = d1 - σ × √ (t).
Volatility (σ), used in the Black-Scholes formula, also has a significant impact on the value of the option. Increased volatility makes options more expensive. In this regard, it is most advantageous to buy this kind of products, when the markets are in a period of growth and trend volatility is minimal.
If you own modeling investors should initially evaluate the benefits of changes in various parameters of even such simple structured products. The complexity of the calculations - just one of a number of reasons for which a sufficiently small number of investors involved in the construction of structured handwritten notes. In most cases, consumers of these products use the services of investment companies and commercial banks that have considerable experience in the preparation and evaluation of these tools. Naturally, services issuers are not free, so investment companies charge a commission from the amount that can be directed to the purchase of options, but the participation of banks and investment companies in the formation of structured products allows investors to avoid a lot of risks that would be faced in creating more complex tools on their own.
Considered in this chapter, the product is quite simple and can be played using traditional financial instruments available to most investors. Next we will look at examples of a much more complex products based on various underlying assets, such kaksyrevye products, interest rates, exchange rates, shares of foreign companies ...
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