Every structured investment is constructed differently, but many of them rely on the same basic concepts. Frequently, the financial engineering involves the purchase of an option that has a payout at maturity, thus giving the structured investment its particular return profile. Employing options provides leverage and facilitates a variety of types of risk and return profiles.
As an example, when an investor purchases a principal protected note with a payoff at maturity based on a broad-based equity index (such as the S&P 500, the NASDAQ-100 or the Dow Jones Industrial Average), the note can be synthetically decomposed into two separate components as diagrammed below.
Although this example is illustrative of the basic concepts involved in structured investment construction, each investment is constructed differently.
If my investment is principal protected, who guarantees that the principal will be paid back?
A principal protected note is backed by the firm that issued the note. In the case of a bankruptcy of the issuer, the note holder would be repaid at a rate equivalent to other senior unsecured debt holders of the firm. Principal protected notes are not FDIC insured.
A structured Certificate of Deposit issued by a bank is generally insured by the FDIC up to $100,000 per depositor, subject to FDIC rules.
Would an issuer want the index underlying a Structured investment to go up or down?
Those who construct structured investments typically seek to design investments that enable investors to realize the maximum possible return given their market view. As such, they often do not take an active view on the structured investments they sell. Instead, an issuer typically hedges its exposure to the equity underlying as completely as possible and is therefore indifferent to the appreciation or depreciation of a structured investment underlying.
What if an investor wants to sell a Structured investment? Can an investor profit by actively trading them?
Once issued, structured investments will generally trade at a discount to their value at issuance due to the embedded distribution and hedging fees included in the original issue price. Structured investments, when not listed, are typically not intended to be actively traded instruments and are intended to be held to maturity. The value of the investments will not directly correspond to the underlying and investors may not receive the expected payout if they sell their investments prior to the stated maturity date.
The tax treatment on structured investments varies with each risk and return profile and depending on the investor’s tax situation. Structured investments are often engineered to receive the most advantageous possible tax treatment. However, investors should contact their own accounting, legal and tax advisors for additional information.
Structured investments are not suitable for all investors. Investors should carefully review the Product & Risk Considerations. Structured investments are intended to be buy and hold investments and are not liquid instruments. This site has been designed for informational purposes only and under no circumstances should any information on the site be used as or considered to be an offer to sell or a solicitation of any offer to buy any securities or any other instruments. Offers and sales of any of these securities or instruments may only be made pursuant to the related offering document which should be read carefully. Investment value prior to maturity will be influenced by many factors, including interest rates, the level of the underlying, implied volatility and the time remaining to maturity. Investors may lose some or all of their investment in connection with some of these instruments. This communication is not intended to provide accounting, legal or tax advice or investment recommendations. Investors should contact their own accounting, legal or tax advisors for additional information. Information on this website is subject to change. JPMorgan endeavors to maintain the information as current and accurate but undertakes no duty to update information or to supply corrections. Certain investment strategies, investments and products discussed by JPMorgan may not be available or suitable for all institutions or clients. This site has been published in the United States for residents of the United States only. This site is not intended for use by, or to provide any information to, investors outside of the United States, and such investors should not rely on any information or material appearing on the site.
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