subject: Structured Trades And Its Applicability In Diversified Retail Portfolios [print this page] Technological innovations in the financial world as well as a spike in the investor class changed the quite retail investment world. Structured trades are notable additions to retail and institutional portfolios. In our todays world, it has become increasingly important that market professionals are able to supply hybrid and complex financial products that is tailored to meet specific investors needs that are far from being galvanized by the standardized financial instrument available in the markets. In a bid to define what structured trades are, lets take a peep at some definitions; U.S. Securities and Exchange Commission (SEC) Rule 434 (regarding certain prospectus deliveries) defines structured securities as "securities whose cash flow characteristics depend upon one or more indices or that have embedded forwards or options or securities where an investor's investment return and the issuer's payment obligations are contingent on, or highly sensitive to, changes in the value of underlying assets, indices, interest rates or cash flows. The Pacific Stock Exchange defines structured products as "products that are derived from and/or based on a single security or securities, a basket of stocks, an index, a commodity, debt issuance and/or a foreign currency, among other things" and include "index and equity linked notes, term notes and units generally consisting of a contract to purchase equity and/or debt securities at a specific time."
Weighing the Pros and Cons of Structured Trades
The popularity of structured products began in Europe and spilled over to the Americas (U.S.), and are now being offered as SEC-registered products, meaning that all retail investors can access them the same way they do exchange-traded funds (ETFs), stocks, bonds and mutual funds. One of the fundamental attractions of structured products for any retail investor is its flexibility of customization of various assumptions into a single instrument. A very common risk thats associated with structured products is the absence of liquidity due to the increasing rate of customization in the investment nature.
Liquidity can be improved upon in some structured products as they come show in form of exchange-traded notes (ETNs). Barclays Bank was the first to introduce this product.
Another associated risk with structured products is the credit quality of the issuer. While cash flows are obtained from different source, the products are said to be legally the issuing financial institutions liabilities.
Using structured trades can be a vital alternative to direct investment, as a tool for the utilization of the current market trend and also a part of the asset allocation that helps in the reduction of risk exposure.
Lastly, it is important to consider the pricing transparency as we see a no uniform standard when pricing.
Structured Trades: The London Pearson Advantage
Structured trades have long been kept out of meaningful representation in tradition retail investment portfolios via the complexity of derivative securities. Retail investors at London Pearson can now access the many benefits of derivatives associated with structured products. It has become even more important with the huge losses associated with the credit crunch, that trades are better controlled and managed from their birth in the market to close with the most assured risk management technique. At London Pearson we see to it that no matter your institution or complexity of your trades, we would provide you with the best solutions to handle structured trades.
by: Jason Keith
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