Structured Product: A Practical Example to Understand How It Works

Structured products often have a reputation for being difficult to understand. To overcome this barrier, nothing beats a concrete, step-by-step example with actual figures, which helps illustrate how this type of financial investment actually works. This guide provides a clear definition, a detailed illustrative example, as well as the benefits, risks, and precautions you should be aware of before investing.

What is a structured product?

A structured product is a financial investment designed by an issuer (usually a bank) that combines a bond component with a derivative indexed to an underlying asset, such as a stock index, a basket of stocks, an interest rate, etc. Upon launch, the product establishes an initial reference level, a term, annual valuation dates, an early redemption threshold, a potential coupon, and a level of principal protection.

A concrete, quantified example of a structured product

Let’s consider a hypothetical, educational example designed to illustrate how a structured product with an automatic call feature (autocall)—one of the most common types on the French market—typically works.

Product Features:

• Underlying asset: a diversified European stock index.
• Initial level: 100 points, as of the launch date.
• Maximum duration: 8 years, with an annual determination date.
• Early call threshold: as soon as the index reaches or exceeds its initial level (100 points) on a valuation date.
• Potential annual coupon: 7% per year, with carryover (a coupon not paid in a given year is made up in subsequent years if the conditions are met).
• Capital Protection Barrier: -40% at final maturity, provided the product has never been called early.

Possible investment process:

1. Year 1: The index stands at 95 points (below its initial level). The product is not called back, no coupon payment is made, but the amount is carried forward.
2. Year 2: The index rises to 102 points, above the initial level. The investment is automatically redeemed: the investor recovers their initial principal, plus the two annual 7% coupons (the one from Year 1, made up for through the carryover effect, and the one from Year 2), for a total return of 14% over two years.

Alternative scenario (without an early call):

If the index had never exceeded its initial level during those 8 years, the product would have reached its final maturity. At that point, two outcomes were possible:

• If the final index stands above the protection barrier (-40%), the investor recovers their entire principal, without any coupon;
• If the final index value is below this threshold, the investor incurs a capital loss proportional to the decline from the initial level.

A second example: the capital-guaranteed product

For comparison, let's consider a simpler structured product with a capital guarantee:

• Underlying asset: a basket of international stocks.
• Duration: 6 years.
• Principal protection: 100% at maturity, regardless of how the underlying asset performs.
• Upside participation: 60% of the equity portfolio’s positive performance, capped at 25% over the entire term.

In this case, if the basket of stocks rises by 30% over 6 years, the investor receives 60% of that gain—or 18%—up to the 25% cap. If the basket declines, the investor still recovers the full amount of their initial investment at maturity, with no gain.

This example clearly illustrates the trade-off inherent in structured products: the security of guaranteed principal comes at the cost of a more limited potential return than with a product that offers conditional principal protection.

The benefits illustrated by these examples

• Complete transparency regarding the rules for gains and losses, unlike a traditional stock investment, where nothing can be predicted in advance.
• An early redemption mechanism that can lock in a gain before the final maturity date, as in the first example.
• Capital protection—either full or conditional, depending on the product chosen—which limits exposure to market risk.
• A carryover provision that allows for the recovery of unpaid coupons from previous years.

The risks illustrated by these examples

• A risk of actual capital loss beyond the protection barrier, as illustrated by the adverse scenario in the first example.
• A potentially capped return, as in the second example, which limits the gain even if the underlying asset rises sharply.
• An investment term that is uncertain from the outset: it is impossible to know whether the product will be redeemed in the first year or only at maturity.
• A credit risk associated with the issuer, independent of the underlying asset's performance: the principal guarantee is only valid if the financial institution remains solvent.

How do these products fit into an investment portfolio?

A structured product is generally not intended to make up the entirety of a portfolio, but rather to serve as a building block for diversification, alongside a more secure foundation (euro funds, bonds) and a more dynamic component (stocks, ETFs). It can be held directly in a securities account or included as a unit-linked investment within a life insurance policy to take advantage of the favorable tax treatment of this investment vehicle, particularly after holding it for 8 years.

Who are these products intended for, and under what conditions should they be used?

The previous examples show that structured products are suitable for investors who:

• able to understand the mechanisms of the barrier, call, and coupon before committing;
• with an investment horizon consistent with the product's term (often 5 to 8 years);
• seeking a balance between safety and performance, rather than maximum, unrestricted performance;
• willing to diversify a portion of their savings into this type of investment, without concentrating all of their financial assets in it.

However, they are less suitable for investors who need immediate access to their capital or who cannot tolerate even a limited risk of loss.

In summary

The examples presented in this guide show that a structured product operates according to a specific and predictable mechanism from the moment it is purchased, but that its actual outcome depends on how financial markets perform over the product’s term. Understanding a numerical example, along with its various possible scenarios, is the best way to gain a practical understanding of the benefits and risks of this type of investment before investing.