Question

Structured Product Explanation

Find a derivative or structured product from any issuer and explain it in plain English. Having done so, state the problems you may have encountered in conveying the features to a client.

The successful submission will clearly and concisely explain the product in a manner appropriate for a retail client who is intelligent but not experienced with investments.

Answer 1

There are various types of Derivatives such as Future contract, forward contract, call option, put option,etc..., which are also traded on the stock exchange platforms. Derivative products derive their value from the underlying assets.

For Example,  a Financial Institution offers a derivative product in nature of a call option in relation to Equity shares of Reliance Ltd. In this product, the strike price of the Call option is set at $200, which can be exercised after 3 months from now. spot Price of this share is $180.Call option provides the client right to buy the equity shares of Reliance Ltd $200 after 3 months from now no matter what the Actual trading price of the shares might be at that point of time. Client may or may not exercise the option after 3 months, at his/her will. Client has to pay a premium of $10.27 for buying this call option now, whether or not he/she actually exercise the option in future. This product provides the client a Hedge cover against risk of increase in price of shares after 3 months.

Problems for Convening to client :-  

• Most of the time, the clients think that derivative products are Risky to invest and there is no certainty in terms of return.
• Clients also do not understand the technical terms such as Exercise price, exercise period, spot price, etc...