Alternative Investments: CAIA Level I, 3rd Edition

CHAPTER 28 Equity-Linked Structured Products

Financial institutions throughout the world are offering investors innovative structured products with complex payouts based on one or more market values, such as the returns of an equity index. One example might be an insurance-related product that guarantees to protect the investor against losses while offering upside returns based on the returns of the Standard & Poor's (S&P) 500 index up to a certain limit. Large institutions offer these structured products using trademarked names along with descriptions of the potential attractiveness of each product in various market environments. This chapter refers to these products as equity-linked structured products, even though some of them have returns driven by market values other than equity values, such as interest rates or commodity prices. The chapter introduces and provides an overview of this large and growing sector of alternative investment opportunities.

28.1 Structured Products and Six Types of Wrappers

Most of the structured products discussed in Chapters 25 to 27 emphasize the goal of transferring relatively simple risk exposures related to an asset or a portfolio from one party to another. Often this transfer serves the dual purpose of meeting the risk preferences of both the issuer and the investor.

Equity-linked structured products, as defined in this chapter, are distinguished from the structured products in Chapters 25 to 27 by one or more of the following three aspects: ...