Do you really understand structured products?

By Larry Haverkamp (Doc Money)

IT is almost funny. We have invested billions of dollars in structured products, but no one seems to understand how they work.

Here's how: Equity-linked notes (ELN) promise high returns and are one of the most popular structured products. The most advertised has been Pinnacle Notes. It is similar to other ELNs.

Your earnings are linked to eight well-known local stocks like DBS, UOB, OCBC and Singapore Press Holdings.

If the price of all eight counters declines by no more than five per cent, you earn an annual return of 8.8 per cent. It's good.

If all eight stocks decline no more than ten per cent, you get 4.8 per cent. It's still good.
For the worst case, if even one stock declines more than 10 per cent, your return drops to zero.

Structured products limit both losses and gains. For Pinnacle Notes, these range from 0 to 8.8 per cent per year for four years. It looks fair.

Dig a little deeper, however, and you'll find problems:

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