Structured products - the risks involved and do people understand them?

• Main Authors: Foo, Nyuk Siong., Chan, Shu Ting., Luo, Jiewei.
• Other Authors: Das, Amit
• Format: Final Year Project
• Published: 2008
• Subjects: DRNTU::Business::Finance::Derivatives
• Online Access: http://hdl.handle.net/10356/11277
• Institution: Nanyang Technological University

Over the last five years, structured derivatives have developed into one of the pre-eminent investment vehicles for financial institutions of all types – including fund managers, banks, insurance companies, and other non-bank financial institutions – as well as significant numbers of corporations with temporary excess liquidity. In the pursuit of higher profits beyond what could be earned from underwriting conventional bonds, investment bankers created collateralized debt obligations (CDOs), which are derivatives built out of commercial debt and loans. However, recent trouble in derivative instruments backed by subprime mortgages prompted investors to rethink the safety of similarly structured derivatives backed by corporate debt. What people need is a simple and easy to understand explanation of how the markets got to this point, together with an explanation of what can be done to help get them back on track, as well as preventing something like this from happening in the future. But on top of that, we should also consider the potential causes for such problems and this includes the need to understand the factors influencing their choices while they make their investment decisions, find out if they really do understand the risk factors behind these products.