24.10.2020

Earn 250%: the dangerous structured notes

For example, when calculating the insurance premium, the insurance company has full statistics on insured events and almost knows exactly how much interest there is a particular risk. However, in order to bear the costs of doing business and have good profit, it must sell the more expensive risk. Customers do not have the real statistics and often buy this risk is much more expensive.

Here it is necessary to make small retreat and to explain the nature of options. The principle of the option can be compared to a conventional insurance policy. Imagine that you decide to insure an event. In the stock market it can be the rise or fall of the price of some asset. The seller of the option determines the probability of what the underlying asset may rise or fall over the selected time period. From sellers of options have the exact formula for calculating its value, but there is one important variable, which is called “implied volatility”, which they usually earn. This parameter is usually highly overstated and provides the seller a very high margin.

This often does not matter whether the underlying asset will rise or fall in price, the main thing – to be able to sell so expensive a product to the award covers possible losses in case of adverse price movements on an asset. The options is endless, and the formula for determining their value is very difficult. That is why selling them to investors and began to make everything: funds, banks, asset managers and other so-called “independent financial advisors”.

Hidden fee

A big problem of market financial Advisory and asset management from the point of view of the Bank are the customers that are heavily traded over the size of the Commission remuneration and do not consider it necessary to reward managers. Banks is much easier to sell clients the tools have a built-in commissions that are simply not visible in the structure of the notes because of the complexity of its design.

In particular, the notes are laid non-linear derivative products in addition to market premium. Meanwhile, the notes is often so complex structured from the point of view of combining the simultaneous purchase of one option and partial sale of others (to donate to the less option premium) that is difficult to understand, at what price and what the investor gets. Lately music engineering has reached such heights that in those or other securities may be understand only by a professional.

I am often faced in practice with such situations, when the bankers, who sold the notes to customers, themselves misunderstood the principle of operation of the securities. Sometimes it begins to seem that notes every day becoming more complex precisely in order to finally take the opportunity the client the opportunity to understand its real value. This effect appears smeared porridge on the table, when at first glance the expected buyer notes the positive effect of the price movement of the underlying asset is offset by many other conditions that when you build the note allowed the seller to greatly reduce its cost.

Every customer upon purchase of the notes should understand that he pays a large number of multilayer premiums. They will get a financial Advisor, the Issuer notes and in some cases the selling agent (in Russia, these agents are often the banks themselves). Tiered interest different stakeholders leads to the fact that the output the customer receives not what he wanted originally. Another common misconception of clients is that the relatively low yield they perceive as a conservative strategy. But in fact, at the time of sale notes a large part of the yield goes to the intermediaries, and client – all that remains. Although in its pure form, the yield on the notes is very high, according to the rules of the market implies a corresponding level of risk.

The basic calculation

In some cases, however, the notes are a good option for allocation of funds. Structured products are actively sold to customers, not only Russian banks and asset managers, but also the eminent Swiss private banking titans. In the European version of the note is often structured in such a way that the customer is least likely to lost the money invested. However, it does not disappear the main disadvantage of the structured product itself – its highly inflated cost. Therefore notes with capital preservation should consider the fact that the yield will be either very small, or absent altogether. But at the same time remain the nominal value of the invested amount.

Experience working with music in the last 10 years can create a feeling of high attractiveness of this product. But a good yield on this instrument is due to the fact that the broad market of foreign shares (which is the most common underlying asset for most music), has grown over the years to 150-200%. It turns out, investors in the notes benefited from the rapid growth market, but also carried high risks. In other words, buying Apple shares 7 years ago, you would have earned about 400%, but by purchasing the notes, among which were Apple, at successful coincidence of circumstances, the maximum income would have amounted to 250%. And this is only the case if your cart was not a single failure of the company.

The decision on whether to buy or not to buy structured products, they make their own. Advice to investors can assess the notes is not the beauty of a brochure, but as a long term financial product for individuals. Professional investors the notes are not purchased. Although this is not surprising – they sell them.

2 thoughts on “Earn 250%: the dangerous structured notes

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