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Structured Products with
2Cents Capital
At 2Cents Capital, we redefine structured investments with innovation and precision. By combining advanced modeling, thorough risk analysis, and cutting-edge market insights, we craft bespoke solutions tailored to your financial goals. Our proprietary framework-merging fundamental and technical analysis, stress testing, and dynamic hedging-transforms market complexities into opportunities for secure, optimized returns. Discover structured products as unique as your ambitions.
The Evolution of Structured Products:
A Smart Investment Solution
Structured products have evolved since their UK debut in the 1990s, originally offering retail investors market exposure with capital protection. Today, they’re a versatile tool, delivering customized solutions for a wide range of financial goals.
Market Expectations:
- Rising Underlying: Benefit from asset appreciation.
- Rising Volatility: Designed to perform in volatile markets.
- Sharp Decline Possible: Capital protection ensures principal safety.
Product Characteristics:
- Minimum Redemption: Capital protection ensures at least the nominal value (e.g., 100%) at expiry.
- Capital Protection: Applies to the nominal value, not the purchase price.
- Value Fluctuations: The value may fall below the protection level during the term.
- Participation: Opportunity to benefit from price increases above a strike level.
- Coupon Payment: Potential for periodic coupons.
Market Expectation:
- Rising underlying
- Sharp decline possible
- No barrier breach during product lifetime
Key Characteristics:
- Minimum redemption = principal protection
- Protection is a % of nominal value (e.g., 100%)
- Applies to nominal value, not purchase price
- Product value may dip below protection
- Participation in price increase above strike
- Redemption if upper barrier breached
- Rebate possible if barrier is breached
Market Expectation:
- Underlying may rise or fall slightly, with potential sharp movements but no barrier breach.
Key Characteristics:
- At expiry, redemption equals principal protection (nominal value).
- Protection is based on nominal value, not the purchase price.
- Product value may dip below protection during its life.
- Participation in price increases above the strike, with limited profit potential.
- Redemption and rebate triggered if the upper barrier is breached.
A Capital Protection Note with Coupon offers principal protection at maturity while providing regular income through coupon payments, linked to the performance of an underlying asset.
Market Expectation:
- Rising underlying asset, with a possibility of a sharp decline.
Characteristics:
- Minimum redemption at expiry equals the capital protection (e.g., 100% of nominal).
- Capital protection applies to the nominal value, not the purchase price.
- The product value may dip below capital protection during its lifetime.
- Coupon payments depend on the underlying asset's performance.
- Periodic coupon payments are anticipated.
- Profit opportunity is limited.
Allows buying an asset below market price, with capped returns. The value aligns with the asset’s price as maturity approaches.
Market Expectation:
- Underlying moving sideways or slightly rising.
- Falling volatility.
Characteristics:
- Discounted compared to the underlying asset's value.
- Limited profit potential with a cap.
- If the underlying is above the strike at maturity, the maximum redemption amount (cap) is received.
- If the underlying is below the strike at maturity, the investor may receive the underlying asset or cash settlement.
- Using multiple underlyings (worst-of) can improve product conditions but comes with higher risk.
Similar to the discount certificate, but with a barrier. If the asset’s price stays above the barrier, the discount applies; if it falls below, it acts as a regular discount certificate.
Market Expectation:
- Underlying moving sideways or slightly rising.
- Falling volatility.
- Underlying will not breach the barrier during the product's lifetime.
Characteristics:
- Discounted compared to the underlying asset’s value.
- Limited profit opportunity with a cap.
- If the underlying is above the strike at maturity or the barrier remains untouched, the investor receives the maximum redemption amount (cap).
- If the barrier is breached, the product converts into a Discount Certificate .
- The barrier increases the likelihood of maximum repayment but results in a lower discount compared to a standard Discount Certificate with similar conditions.
- Using multiple underlyings (worst-of) can enhance product conditions, but with higher risk.
Offers higher coupons but risks conversion into the underlying asset if its price drops below a set barrier, potentially causing losses.
Market Expectation:
- Underlying moving sideways or slightly rising.
- Falling volatility.
- Underlying will not breach the barrier during the product's lifetime.
Characteristics:
- Coupon is paid regardless of the underlying's performance.
- Limited profit opportunity with a cap.
- If the underlying is above the strike at maturity or the barrier is not touched, the investor receives the maximum redemption amount (cap).
- If the barrier is breached, the product becomes a Reverse Convertible .
- The barrier increases the probability of maximum repayment but results in a lower coupon than a Reverse Convertible with identical conditions.
- Using multiple underlyings (worst-of) enhances product conditions but increases risk.
Similar to the barrier reverse convertible, but coupons are paid only if the asset’s price stays above a certain level.
Market Expectation:
- Underlying moving sideways or slightly rising.
- Falling volatility.
Characteristics:
- Coupon payment depends on specific conditions.
- Limited profit opportunity with a cap.
- Typically includes an autocall trigger: if the underlying is above the trigger on the observation date, the nominal amount plus any coupon is repaid early.
- Using multiple underlyings (worst-of) can improve product conditions, but with higher risk.
Combines both features, providing coupons if the asset’s price stays above a barrier, but no coupons if it falls below.
Market Expectation:
- Underlying moving sideways or slightly rising.
- Falling volatility.
- Underlying will not breach the barrier during the product's lifetime.
Characteristics:
- Coupon payments are conditional.
- Limited profit potential with a cap.
- Often includes an autocall feature: if the underlying exceeds the autocall trigger on the observation date, the nominal amount plus any coupon is repaid early.
- If the barrier is touched, the product may convert into underlying delivery and/or cash settlement.
- The barrier increases the likelihood of maximum repayment, but results in a lower coupon compared to a Conditional Coupon Barrier Reverse Convertible without the barrier.
- Multiple underlyings (worst-of) can enhance product conditions but come with higher risk.
This product tracks the performance of a specific asset or basket of assets. It provides investors with exposure to the price movements of the underlying assets, typically offering a direct link to their performance with no added leverage.
Market Expectation:
- Expecting the underlying asset to rise.
Characteristics:
- Participates directly in the asset’s performance, reflecting its price changes.
- Follows a 1:1 movement with the underlying, with adjustments based on conversion ratios and related fees.
- Allows for dynamic management of the underlying to optimize returns.
A bonus certificate allows the investor to receive a fixed bonus payment if the underlying asset stays above a certain price level during the product's term. If the asset falls below this level, the investor may face a lower return or loss.
Market Expectation:
- Underlying asset moving sideways or rising.
- Underlying will not breach the barrier during the product’s life.
Characteristics:
- Participates in the underlying asset's performance.
- Minimum redemption equals the nominal value as long as the barrier is not breached.
- If the barrier is breached, the product converts into a Tracker Certificate.
- With higher risk, using multiple underlyings (worst-of) can offer a higher bonus level or a lower barrier.
This certificate allows investors to benefit from price movements in both directions. It provides a return whether the underlying asset rises or falls, up to a certain limit, and can be used in volatile markets.
Market Expectation:
- Underlying asset moving sideways or rising.
- Underlying will not breach the barrier during the product's life.
Characteristics:
- Participates in the underlying asset's performance.
- Profits are possible from both rising and falling asset prices.
- A falling price up to the barrier can generate profits.
- Minimum redemption equals the nominal value, provided the barrier is not breached.
- If the barrier is breached, the product switches to a Tracker Certificate.
- Higher risk levels and multiple underlyings (worst-of) offer a higher bonus or lower barrier.
This product participates in the underlying's performance with outperformance above the strike and offers a minimum redemption equal to the nominal if the barrier isn't breached. If the barrier is breached, it converts into an Outperformance Certificate, and using multiple underlyings can increase the bonus level or lower the barrier.
Market Expectation:
- Rising underlying asset.
- Underlying will not breach the barrier during the product’s lifetime.
Characteristics:
- Participates in the underlying asset’s performance.
- Offers disproportionate (outperformance) returns from positive price movements above the strike.
- Minimum redemption equals the nominal value if the barrier is not breached.
- If the barrier is breached, the product converts into an Outperformance Certificate.
- With higher risk, using multiple underlyings (worst-of) can provide a higher bonus or a lower barrier
Allows investors to benefit from amplified returns based on the performance of an underlying asset, often offering leverage to outperform the market. It provides higher returns without a cap, but carries increased risk if the asset’s price moves unfavorably.
Market Expectation:
- Rising underlying asset.
- Increasing volatility.
Characteristics:
- Participates in the performance of the underlying asset.
- Offers disproportionate participation (outperformance) in positive price movements above the strike price.
- Reflects the underlying’s price moves 1:1 when the price is below the strike.
Market Expectation:
- Ideal for moderately bullish markets where the underlying asset is expected to rise within a specific range.
- Not suitable for highly bullish markets, as gains are capped beyond a predefined level.
- Best suited for investors seeking higher participation within a controlled risk-reward framework.
Characteristics:
- Cap:
- Sets the maximum return, defining the upper limit of potential gains.
- Ensures enhanced returns within the capped range but limits profitability beyond it.
- Exercise Price:
- The price at which enhanced participation begins, acting as the lower threshold for returns.
- Participation Rate:
- Offers amplified returns between the exercise price and the cap compared to direct investment.
- Deviations in the participation rate may occur during the term due to structural factors.
- Performance:
- Outperforms direct investment within the capped range due to higher participation rates.
- Becomes less profitable beyond the cap compared to direct investment in a strongly rising market.
- Term:
- The full benefit of participation and capped returns is realized at the certificate's maturity.
- Outperformance Point:
- Marks the level where direct investment becomes more advantageous due to uncapped growth potential.
These are similar to options and give the investor the right to buy or sell an asset at a certain price before a specific date. Warrants can be designed to provide extra leverage, meaning small changes in the underlying asset’s price can result in larger changes in the warrant’s value.
Warrant (Call):
- Suitable for rising underlying and increasing volatility.
- Offers leveraged returns based on the asset’s performance.
- High potential for profit but also carries the risk of total loss (limited to the initial investment).
- Ideal for speculation or hedging strategies.
- Time decay causes value loss, accelerating as expiration nears.
- Requires active monitoring.
Warrant (Put):
- Suitable for falling underlying and rising volatility.
- Provides leveraged returns if the asset declines.
- Potential for total loss, limited to the initial investment.
- Often used for speculation or hedging.
- Time value erodes, accelerating as the expiration date approaches.
- Ongoing monitoring is essential.
These are a special type of warrant that becomes worthless if the price of the underlying asset hits a certain level (the knock-out barrier). This feature adds leverage by making the product very sensitive to small price changes.
Knock-Out (Call):
- Designed for a rising underlying asset.
- Offers leveraged returns based on the asset’s upward price movement.
- High risk of total loss, limited to the initial investment.
- Ideal for speculation or hedging.
- The product becomes worthless if the barrier is breached during its term.
- Minimal impact from volatility and only slight loss of time value.
- Requires ongoing monitoring.
Knock-Out (Put):
- Targets a falling underlying asset price.
- Generates leveraged returns if the asset decreases in value.
- Risk of total loss, limited to the original investment.
- Suitable for speculation or hedging purposes.
- Immediately expires worthless if the barrier is hit during the product’s life.
- Volatility has little effect, with only a small loss of time value.
- Continuous monitoring is essential.
Mini Futures enable leveraged exposure to rising (Long) or falling (Short) prices of various assets, including stocks, indices, commodities, and cryptocurrencies. They have no fixed term and terminate only upon hitting the stop-loss level.
Mini-Future (Long):
- Targets a rising underlying asset.
- Provides leveraged returns based on upward price movement.
- Potential for high profits, but total loss is limited to the initial investment.
- Ideal for speculation or hedging.
- Continuous monitoring is required.
- A residual value is redeemed if the asset hits a stop-loss level.
- Volatility has no effect on this product.
Mini-Future (Short):
- Designed for a falling underlying asset price.
- Generates leveraged returns if the asset declines.
- Risk of total loss, limited to the initial investment.
- Suitable for hedging or speculation.
- Monitoring is necessary.
- The product redeems a residual value if the stop-loss is triggered.
- No impact from volatility.
These funds aim to deliver multiple times the daily return of an index or asset. They achieve this by using derivatives and other strategies. Leveraged ETFs are mainly used for short-term trading since the leverage resets daily.
Long:
- Targets a rising underlying asset.
- Provides leveraged returns based on upward movement.
- Potential for high profits, but total loss is limited to the original investment.
- A stop-loss or adjustment mechanism helps prevent the product’s value from going negative.
- Frequent price direction shifts of the underlying negatively impact performance.
- Regular resetting maintains consistent leverage.
- Continuous monitoring is necessary.
Short:
- Designed for a falling underlying asset.
- Offers leveraged returns if the asset price declines.
- Risk of total loss, limited to the initial investment.
- A stop-loss or adjustment feature helps avoid negative value.
- Changes in the underlying asset’s price direction can hurt performance.
- Resetting the product regularly ensures constant leverage.
- Requires active monitoring.
Why Aren’t Structured Products
Everyone’s Cup of Tea?
Structured products have undeniable potential, yet they remain underappreciated in certain regions. Their perceived complexity, high entry barriers, and liquidity challenges often deter individual investors. At 2Cents Capital, we recognize these pain points and are dedicated to reshaping the narrative. Here’s how we’re tackling the most common challenges:
1. Complexity: Simplifying the Sophisticated
Structured products can seem complex, but at 2Cents Capital, we turn complexity into clarity. Our expert team simplifies the technicalities, presenting them in clear, actionable terms, so you feel confident and informed. With us, structured products are accessible to all, regardless of financial expertise
2. OTC Trading: Building a Seamless Platform
Structured products are often traded OTC, making the process opaque and cumbersome. At 2Cents Capital, we’re changing that with a user-friendly platform that simplifies trading and connects you with issuers seamlessly. We’re bridging the gap between OTC and exchange-like trading, bringing structured products to the mainstream.
3. High Minimum Ticket Size: Lowering the Barrier to Entry
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Structured products have traditionally required a high minimum investment, often around $100,000, limiting access to a select few. At 2Cents Capital, we’re reducing this threshold to make these products accessible to a wider range of investors.
4. Liquidity: Leveraging Our Network for Your Benefit
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Liquidity can be a challenge with structured products, but at 2Cents Capital, we turn it into an opportunity. Leveraging our extensive network of issuers and industry connections, we help you exit or restructure investments with ease. With us, liquidity is never a barrier.
The X Factor Framework
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Investment Checklist: Key Questions to Consider Before Investing in Structured Products
Before committing to structured products, it’s crucial to evaluate whether the investment aligns with your financial goals, risk tolerance, and market understanding. Answer the following questions to ensure you’re making an informed decision:
1. What are your market expectations?
- Do you anticipate growth, stability, or volatility in the markets?
- How do you expect individual underlying assets to perform?
2. How well do you know the underlying asset?
- Have you analyzed its recent performance and market behavior?
- Are you aware of factors influencing its price movements?
3. Do you understand the product's profit potential?
- Can you identify the specific conditions under which the product will generate a return?
- Are you clear on the participation or payoff structure?
4. Are you prepared for potential losses?
- Do you understand the market scenarios that could lead to a partial or complete loss of capital?
- Have you assessed the product's downside risk?
5. Do you know the issuer and associated risks?
- Are you familiar with the financial stability and creditworthiness of the issuer?
- Have you evaluated the issuer risk and its potential impact on your investment?
6.Does the product match your risk profile?
- Does the level of risk align with your financial goals and investment strategy?
- Have you considered how this product fits within your broader portfolio?
7. Have you reviewed all available information?
- Have you studied the product documentation, including terms, conditions, and potential scenarios?
- Have you consulted independent research or sought professional advice if needed?
8. What is your investment horizon?
- Are you comfortable holding the product until maturity?
- Do you understand the implications of early redemption or liquidity constraints?
By carefully addressing these questions, you’ll be better equipped to determine whether a structured product is the right fit for your investment strategy. At 2Cents Capital, we prioritize transparency and investor education, ensuring you have all the tools and insights needed to make confident decisions.
Mastering Risk Management and Hedging in Structured Products
At 2Cents Capital, we understand that navigating the complexities of structured products requires expertise, innovation, and a proactive approach. Our specialized hedging and risk management strategies ensure that your investments are protected and optimized for maximum returns.
Why Structured Products?
Structured products have surged in popularity within retail markets, driven by attractive rates, favorable volatility levels, and a growing investor base recognizing their benefits in capital protection and yield generation. These sophisticated financial instruments offer tailored solutions that cater to diverse investment goals, making them a preferred choice for many.
''Risk management is not about avoiding risks, but understanding them'
The Backbone of Structured Products: Hedging
Effective hedging is fundamental to mitigating risks associated with adverse price movements of underlying assets. At 2Cents Capital, our hedging strategy focuses on three primary objectives:
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Capital Preservation
Protecting your investment against significant downside risk, especially in the event of a Barrier Event, is paramount. Our strategies ensure that your capital remains safeguarded even in turbulent market conditions.
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Volatility Management
High market volatility can increase the likelihood of breaching the Barrier Level. We employ sophisticated techniques to hedge against volatility spikes, maintaining the stability of your investments.
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Coupon Protection
Ensuring that periodic coupon payments are not compromised due to adverse market conditions is a key focus. Our hedging methods guarantee consistent income streams, regardless of market fluctuations.
Given the product’s dependence on the worst-performing underlying, a robust hedging strategy can reduce potential losses and enhance the predictability of returns. Dynamic hedging allows investors to respond to changing market conditions, such as heightened volatility or significant drops in any underlying asset's price.
Delta Hedging: The Cornerstone of Risk Management
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Among the myriad risks—volatility, correlation, dividends, currencies, and interest rates—the most critical hedge is the delta. Delta hedging ensures that changes in the underlying asset's value are meticulously managed. “The delta hedge is calculated by the sensitivity of the product payoff to the underlying asset.” – Tim Mortimer, FVC
Why Delta Matters
Delta measures the sensitivity of a structured product’s payoff relative to the underlying asset's price movements. As the value of the underlying asset fluctuates, so does the delta hedge, requiring continuous adjustment to reflect the product’s current valuation and future prospects.
Dynamic Adjustments
The size of the delta hedge evolves throughout the product’s life, influenced by key events such as:
- Initial and Final Hedge Adjustments
- Coupon and Capital Barrier Events
- Singularities like Digital Payments
These adjustments ensure that the hedging strategy remains aligned with the product’s performance and market conditions.
Technical Methods of Delta Hedging
At 2Cents Capital, we employ various technical methods to ensure precise and effective delta hedging. These methods include:
1. Static Delta Hedging:
- Involves setting a fixed hedge ratio at the inception of the structured product and maintaining it without frequent adjustments. To implement this, we typically trade the underlying equities or futures, ensuring a straightforward but less responsive approach to market changes.
2. Dynamic Delta Hedging:
- This method requires continuous monitoring and frequent adjustments to the hedge ratio as the underlying asset’s price fluctuates. We execute trades in equities, options, or ETFs to adapt to these movements. While this minimizes risk exposure, it can lead to higher transaction costs due to frequent rebalancing.
3. Gamma Hedging:
- Used alongside delta hedging to manage second-order sensitivity (gamma) of the product’s payoff. By trading additional options, we stabilize the delta and reduce the need for constant adjustments, enhancing overall hedging efficiency.
4. Portfolio Rebalancing via Options
- Options play a crucial role in fine-tuning the delta hedge. For example, buying put or call options allows us to counteract shifts in the underlying asset’s price, providing a flexible and cost-effective hedging solution.
5. Monte Carlo Simulations for Delta Calculation:
- We utilize advanced computational models to simulate various market scenarios, helping us calculate and maintain the optimal delta hedge under diverse conditions. This method is particularly useful for complex structured products with non-linear payoffs.
6. Algorithmic Trading for Real-Time Adjustments:
- Leveraging automated trading systems, we execute delta hedging trades with precision and speed, particularly in fast-moving or highly volatile markets. This ensures that our hedges remain effective and timely.
Comprehensive Risk Management
Effective risk management transcends delta hedging. It encompasses:
- Volatility Management: Anticipating and responding to market volatility shifts.
- Correlation Analysis: Understanding interdependencies between different assets.
- Dividend and Currency Risk: Mitigating impacts from dividend payouts and currency fluctuations.
- Interest Rate Risk: Adjusting strategies to counteract interest rate changes.
Our holistic approach ensures that all potential risks are identified, assessed, and managed proactively.
“In the midst of chaos, there is also opportunity.” – Sun Tzu
Why Choose 2Cents Capital?
At 2Cents Capital, our expertise in hedging and risk management for structured products is unparalleled. By utilizing cutting-edge in-house methodologies, we deliver robust, tailored solutions that safeguard investments and maximize returns.
Key Benefits:
- Innovative Hedging Techniques: Customized strategies that adapt to market dynamics.
- Cost Efficiency: Minimizing transaction costs to protect profitability.
- Expert Insights: Leveraging deep market knowledge for informed decision-making.
- Comprehensive Risk Coverage: Addressing all facets of risk to ensure stability.
Meet the team behind
Structured Products
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Frequently Asked Questions
Structured product is combination of equity, bonds and derivatives combining them gives a customized returns on any required underlying it be commodity, equity or bonds.
The maturity of a structured product can vary widely, ranging from six months to ten years. Most, however, have maturities between two to five years, depending on the type of product and the underlying asset.
Redeeming a structured product before its maturity date is generally not straightforward, but it can depend on the terms of the specific product and market conditions. Here’s what you need to know:
Early Redemption Options:
- Autocallable Features: Some structured products are designed with autocallable features, meaning they can redeem early if predefined conditions (like the underlying asset hitting a trigger level) are met.
- Secondary Market Sale: You might be able to sell the product in a secondary market, but this is not guaranteed. Liquidity can be limited, and you may receive less than the initial investment depending on market conditions and interest rates. If you are working with us we will take care of the liquidity.
Auto-callable structured products are investment vehicles that can be automatically redeemed before their maturity date if a specific condition, usually tied to an underlying asset's performance, is met. Typically, these products are linked to stock indices or individual stocks, and the early redemption triggers when the underlying asset hits a pre-defined price level on a specific observation date.
Structured products can offer tax-efficient returns by providing payouts in the form of capital gains instead of income, which are often taxed at lower rates. Additionally, certain structures defer taxes until maturity, allowing for better tax planning and reduced annual tax liabilities.
Yes, structured products are legal in India and are regulated by the Securities and Exchange Board of India (SEBI). These products typically combine traditional debt instruments, like zero-coupon bonds, with derivatives to offer customized returns linked to market indices or specific assets.
SEBI regulates structured products under its guidelines for market-linked debentures (MLDs). Only principal-protected structured products are classified as debt securities, ensuring the return of the principal amount at maturity, provided the issuer remains solvent. Issuers must have a minimum net worth of ₹100 crore, and the minimum investment is set at ₹10 lakh, targeting high-net-worth individuals (HNIs) and institutional investors.
SEBI requires detailed disclosures, including credit ratings (denoted as "PP-MLD") and risk scenarios, ensuring transparency. While structured products offer potential benefits like capital protection and higher returns, they come with risks such as credit, liquidity, and complexity, so investors should evaluate them carefully.
