7 Structured Deposits and Other Structured Products
7.1 Structured products: purpose and suitability
Section titled “7.1 Structured products: purpose and suitability”Structured products combine a deposit, note, fund, warrant, ILP, ETF/ETN or other wrapper with derivatives. They can customise a market view, enhance yield, preserve capital at a stated maturity, provide participation/discount/leverage, hedge an exposure, change currency or rebalance without directly buying the underlying.
Suitability requires understanding risk appetite, knowledge/experience, liquidity needs, investment horizon, currency, concentration, principal-loss potential, leverage, counterparty, early-exit rules, fees, tax, restrictions and the client’s actual objective. Product features are trade-offs: higher coupon commonly means selling protection or accepting conversion/conditional principal.
7.2 Capital-preservation deposits
Section titled “7.2 Capital-preservation deposits”In Singapore, structured deposits are bank deposit obligations with principal paid in full at maturity, with or without interest, but they are not necessarily covered by deposit insurance and early withdrawal may incur loss of principal/return. The bank’s credit standing still matters. “Capital preservation” normally means at maturity and subject to the stated currency and issuer — not a guarantee of mark-to-market value.
Principal component plus derivative strategies include:
- standard call/put conversion;
- knock-out deposits (feature disappears after a trigger);
- knock-in/appearing features;
- bull call/bull put spreads;
- one-touch lock-in;
- double-no-touch/range currency deposits;
- range accrual.
7.3 Yield-enhancement deposits
Section titled “7.3 Yield-enhancement deposits”A standard dual-currency investment (DCI) is economically a money-market deposit plus a short currency call/put. The bank pays a higher return but can convert principal and interest into an alternate currency at the strike if the trigger condition is met. The investor must be willing to own the alternate currency and bear its value falling against the base currency.
- KO DCI/disappearing: the option feature terminates if a knock-out occurs.
- KI DCI/appearing: the conversion feature activates only after a barrier is hit.
- Accumulator: often long calls plus short puts, regular discounted purchases, a knock-out barrier and sometimes 1×2 gearing; downside loss can be very large.
- Decumulator: reverse economics; the investor may sell/accumulate the underlying through short calls and can be forced to deliver/sell when price rises.
7.4 Structured products
Section titled “7.4 Structured products”Range currency deposits/range accruals pay a high rate for observations inside a range and a lower rate outside it. A one-touch may lock in a rate or terminate/convert after a touch. Bull/bear spreads cap the maximum payoff. Step-up structures alter the coupon over time, often with a callable feature. Every structure should be decomposed into deposit/bond plus long or short option legs.
7.5 Summary
Section titled “7.5 Summary”Structured deposits may improve yield or customise currency/market exposure but can return less than a plain deposit, convert currency at an unfavourable level, be hard to exit and expose the investor to bank credit risk. The client must understand the worst case, not only the headline yield.
Chapter 7 appendix
Section titled “Chapter 7 appendix”The non-exam appendix expands deposit strategies and demonstrates that yield enhancement is commonly the premium received for selling an option. It reinforces early withdrawal, currency conversion, barrier and suitability issues.