Structured derivatives are financial instruments, where the returns are related to interest rates, underlying stocks, currencies, commodities and indices. They enable investors to reap the benefits of the performance of various asset classes. Structured derivatives are used as a variable alternative to traditional investment products and are targeted towards investors, who have a specific risk profile, return requisite and market expectancy. An investor should have considerable expertise and deep knowledge of a full range of financial instruments, hedging and risk management to participate in this kind of investment.
Structured derivatives are typically prepackaged investments. Profit and loss is dependent on the performance and value of the underlying asset. Investment banks and other financial service providers package these derivatives on behalf of their clients and charge a fee for providing these services. Structured derivatives have a complex structure and might incorporate certain tax benefits, enhanced returns and a reduction in volatility, depending on the type of structure.