Structured products and commodities

Years ago I used to trade options and other financial instruments on the trading floor of the option exchange in Amsterdam. I have been a market maker in options for many years, and options are essential to create structured products; both plain vanilla options and Exotics. We created our own structured products then, although at that time nobody had ever heard of the term structured products. Neither had we. But they are very useful and can provide us many advantages.

Problems with direct investment

Consider the next two situations regarding commodities. The first is your bullish vision; you expect the market to go up. Then what do you do? Who would like to store a few barrels of oil in his shed, a load of gold bullion in his cellar, or even some cattle in his backyard? No-one, of course. As you can see, direct investments in commodities are not always very convenient, especially if you live on the 45th floor of a skyscraper. However, structured products may help you find the solution.

Next, how can you profit when you are bearish and expect the market to go down? Definitely not by direct investments! No, that would be impossible. Fortunately, some structured products can and do add value in bearish markets.

Additionally, structured products are also very handy for investing in markets that are difficult to access. You will be able to enter those markets, the Taiwanese stock market or the South African bond market for instance, with indirect investments by using structured products.

Flexible structured products

Further, structured products will help you to optimize your risk-reward ratio. Their variety will provide you the opportunity to lower your risk and maintain the same potential at the same time (by using Notes including capital protection, for instance). On the other hand, if you just want to raise your potential you can use other types of structured products, especially those which provide you leverage. In other words, structured products will provide you optimal flexibility.

Now, this is very important: structured products can optimize your risk-return pattern. Every investor wants to lower his risk. In fact, we all strive for zero risk and unlimited potential but unfortunately this is only possible in Utopia. We all know that risk and reward are connected; we can't have any returns if we don't take any risks. Therefore we try to act as the Homo Economicus who seeks to optimize return while minimizing the amount of risk outstanding. 'Optimization' is the magic word.

Luckily, investors can use a variety of products all suiting different needs and requirements, ranging from products with low profile (think of notes with capital protection and click products) to high risk instruments (like lease constructions, steepeners, turbos, covered warrants and trackers). Other categories are: convertibles, exchangeables, and of course reverse convertibles and reverse exchangeables. Additionally, knock-in and knock-out structures are used in many products.

All in all, we can conclude that structured products are interesting to all investors as they provide accessibility, flexibility based on creativity, and optimization of their desirable risk-reward profile.