If you’ve heard of Structured Notes but aren’t quite sure what they are or how they work, this brief is for you. It explains how Soft or Barrier Protection, one type of Structured Note protection, can eliminate the negative return of the investment in volatile market conditions.
Structured Notes, categorized as bond instruments, have characteristics of both an equity security and a fixed-income product. Their performance is linked to the return of an underlying asset. The specific payoff profile and protection levels of a Structured Note can be tailored to suit the preferences of advisors for their clients. Two types of protection levels exist: hard protection (buffer) and soft protection (barrier). This brief explores the features of soft protection and examines how different levels of this protection can mitigate or reduce the negative return of the underlying asset in specific market conditions.
Soft Protection insulates against market risk by absorbing all of the underlier’s negative return (in some cases) by modifying the return of the underlier on the maturity date of the Structured Note.
When the underlier’s negative return is between 0% and the protection level, Soft Protection absorbs the underlier’s negative return completely, resulting in a 0% return for the Note. In other words, the Structured Note fully absorbs the underlier’s negative return.
However, when the underlier’s negative return is below the protection level, the Note’s loss is the same as the underlier’s loss.
The table below shows how Soft Protection modifies the underlier’s return:
Barrier-structured notes are a type of investment that offers downside protection. They give regular income through coupon payments and have a payout at maturity. These notes can meet different client needs and serve as a powerful tool in shaping your portfolio.
Each note is linked to the performance of the underlying assets like stocks or others. The payout depends on how these linked assets do over time. There’s an “up” side where investors can gain more if the asset does well.
But there’s also a “down” side with risk controls to stop big losses if things go wrong.
The key feature is its barrier – this sets the loss limit for investors but it also impacts any gains made. If you invest in Barrier Structured Notes, they shield part or all of your original money even when stock prices drop within agreed limits.
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