RMI Lecture: Structured Financial Products: Are they right for you?
The Risk Management Institute (RMI) of the National University of Singapore (NUS) conducted a talk title ‘Structured Financial Products: Are they they right for you?’ yesterday. The talk was delivered by Dr Oliver Chen, Programme Director of the Masters of Science (Financial Engineering). This was part of the RMI lecture series on Enhancing Financial Risk Management Knowledge and is conducted for public service.
The talk touch on what is CDS, CLN, Synthetic CDO. the recent examples of Minibond, High Notes, Jubilee Notes and Pinnacle Notes. The product information is largely captured by my previous posts. Refer to the related posts below.
I find 2 topics rather interesting. They are:
- Why were structured products issued?
- Are structured products right for you?
At the start of the talk, Dr Chen shared a short video of a speech by former US Secretary of Defense, Donald Rumsfeld.
“…as we know, there are known knowns; there are things we know that we know. There are known unknowns; that is to say there are things that we now know we don’t know. But there are also unknown unknowns – there are things we do not know we don’t know.”
The lecture aims to minimise the unknown unknowns (which cannot be totally eliminated) through education. Unknown unknowns should come from future unknowable events, not from lack of knowledge.
Why were structure products issued?
- There was a demand for higher yields as bonds yields were low
- In order to receive higher return, investors need to take higher risks. Prior to Bear Stearns’ collapse, the credit spreads were also low, suggesting that the perceived risks were not high
- There are 2 reasons why financial institutions supplied the products: Fee generation and hedging purposes
- The fees appear to be from the usual commissions and not from excessive overpricing
Are structured products right for you?
- Understand the descriptions before investing. If you know what you do not know and is comfortable with it, then the product may be suitable. Eg, you do not know what credits events will happen in the future, but you should know which credit event will affect your investment. Are you comfortable with the potential loss. If the large loss is unacceptable, then a principle protected/guaranteed note may be more appropriate.
- If you do not understand the product, then it is not right for you
- There are other types of notes that make sense to average investors. Eg, in the current market, how many equity investors would rather have invested in a principle protected, equity-linked notes?
- Make sure you can understand the structure. Demand simplicity
- Diversify risks, not concentrate on a small number of firms, unless you know them well. Index-linked equity notes may be more better choice in terms of diversification
Related Posts
Tags: Structured Prd
