Collective Investment Schemes II - Structured Products and Derivatives

Comprehensive vocabulary flashcards covering structured products, derivatives, investment wrappers, risk considerations, and fund structures based on the Singapore College of Insurance Collective Investment Schemes II study text.

Structured Product

A pre-packaged investment security created by combining traditional assets, such as bonds, with financial derivatives (usually an option) to achieve specific risk-return profiles tailored to investor expectations.

Wrapper

The legal and administrative format under which a structured product is manufactured and marketed, including structured deposits, structured notes, structured funds, and structured investment-linked policies (ILPs).

Structured Deposit

A bank-issued investment product that combines a deposit with an investment component; despite its name, it is classified as an investment product and is excluded from the Deposit Insurance Scheme in Singapore.

Structured Note

An unsecured debenture issued by a financial institution wherein the note-holder lends money to the issuer, offering full flexibility in product design but exposing the investor to the credit risk of the issuer.

Structured Fund

A Collective Investment Scheme (CIS) that uses derivative instruments or securities with embedded derivatives to generate a targeted, formulaic risk-reward profile.

Structured Investment-linked Life Insurance Policy (ILP)

A life insurance policy structure issued exclusively by life insurers that combines term insurance protection with a structured fund providing the investment return.

Principal Risk

The credit risk associated with the fixed income instrument used in a structured product, typically comprising senior, unsecured debt of the bond issuer.

Return Risk

The exposure of the investment return component of a structured product to market volatility and derivative counterparty default upon the contract's fixed expiration date.

Capital Protection

A structured product design feature that uses a fixed income instrument (such as a zero-coupon bond) to preserve all or a majority of the principal component at maturity.

Yield Enhancement Product

A category of structured products (such as reverse convertibles and discount certificates) that offers returns higher than traditional fixed income instruments with capped upside and no downside capital protection.

Reverse Convertible Bond

An unsecured debt note consisting of a bond and a written put option, paying regular interest but delivering shares of the underlying stock in lieu of par value if the stock falls below a pre-determined kick-in level.

Kick-in Level

A pre-determined price threshold in a reverse convertible bond (usually $20\%$ to $30\%$ below the issue date price) which, when breached, obligates the investor to accept physical shares instead of par value at maturity.

Discount Certificate

A yield enhancement product sold at a discount to the spot price that allows participation in the underlying asset up to a pre-determined cap-strike, delivering either cash or underlying stock at maturity.

Participation Product

A structured debenture that participates directly in the price performance of the underlying assets, typically offering full upside potential with no downside principal protection.

Tracker Certificate

An open-ended participation instrument with no maturity date that mirrors the exact performance of an underlying asset or tailored index without an upside cap or downside protection.

Bonus Certificate

A participation product offering a guaranteed bonus payout at maturity provided the underlying asset price does not breach a specified barrier level during its life.

Knock-out Feature

A contractual mechanism in barrier derivatives where conditional protection or payout rights permanently terminate once the underlying asset touches or breaches a predetermined barrier level.

Airbag Certificate

A participation product designed to cushion the effect of a market decline by extending downside protection up to a specified airbag level without a sudden drop in payoff at that threshold.

Issuer-Specific Risk

Risk factors that specifically affect the price of a single issuer's securities, such as a credit rating downgrade, operational failure, business risk, or regulatory litigation.

Payment Netting

A settlement procedure (also known as settlement netting) that calculates the net difference between opposing obligations on the same date, minimizing the exchange of cash and securities to mitigate counterparty risk.

Collateral Risk

The risk that the liquidated market value of pledged collateral is insufficient to cover losses upon a counterparty default due to under-collateralisation or asset depreciation.

Derivative Contract

A delayed-delivery financial agreement whose value is derived from or dependent upon the performance of underlying assets, benchmark rates, indices, or commodities.

Cost of Carry

The net expenses associated with holding an underlying asset until delivery—including storage, insurance, transport, and financing interest minus dividends or rental income—added to the spot price to determine the forward price.

Contango

A market situation where the futures price of an asset is higher than its current spot price, typically driven by ongoing carry costs like storage, financing, and insurance.

Backwardation

A market condition where the futures price of an asset is lower than its current spot price, commonly occurring during acute temporary shortages or production bottlenecks.

Basis

The price differential between the spot price of an asset and its futures price ($\text{Basis} = \text{Spot Price} - \text{Futures Price}$).

Initial Margin

The upfront cash deposit required by an exchange or broker to open a leveraged position in futures or derivative contracts.

Maintenance Margin

The minimum account equity threshold that an investor must maintain to prevent the broker from issuing a margin call.

Variation Margin

The additional cash payment required from an investor to restore their margin account balance back to the initial margin level following market losses.

Portfolio Beta

A statistical measure of the sensitivity of a portfolio's returns relative to the movements of an underlying benchmark market index.

European Style Option

An option contract that grants the holder the right, but not the obligation, to exercise the contract strictly on its expiration date.

American Style Option

An option contract that grants the holder the right to exercise at any point on or before the contract's expiration date.

Asian Option

An exotic option whose settlement payout is determined by the average price of the underlying asset over a preset period rather than its price at maturity.

Binary Option

An all-or-nothing exotic option that pays out a predetermined, fixed amount of cash or underlying asset if the condition is met at expiry, and zero otherwise.

Covered Call

An option strategy where an investor writes a call option against shares they already own to earn premium income while capping their potential upside profit at the strike price.

Protective Put

A risk management strategy where an investor buys a put option on a stock they currently hold to establish a price floor against downside losses while preserving unlimited upside.

Bull Straddle

A neutral volatility strategy involving the simultaneous purchase of a call and a put option at identical strike prices and expirations, profiting from substantial price swings in either direction.

Bear Straddle

An option strategy involving the simultaneous sale of a call and a put option at the same strike and expiration, generating maximum profit when the underlying asset remains range-bound at the strike price.

Interest Rate Swap

An OTC agreement between two counterparties to exchange periodic interest rate cash flows (usually fixed-rate for floating-rate) calculated on an agreed notional principal in the same currency.

Credit Default Swap (CDS)

A credit derivative contract in which the protection buyer makes periodic premium payments to the protection seller in exchange for compensation if a specified reference entity defaults.

Equity Swap

A contract where two parties exchange cash flows where at least one stream is linked to the performance of an equity stock or index, often used to avoid cross-border investment barriers.

Contract for Differences (CFD)

A leveraged margined contract between an investor and a broker to settle the cash difference between the opening and closing prices of an underlying security without an expiration date.

Forward Pricing

A fund dealing practice where unit subscription and redemption orders are executed at the Net Asset Value (NAV) determined on the next asset valuation date rather than a past date.

Turnover Ratio

The percentage of a fund's daily average NAV represented by the lesser of purchases or sales of underlying investments within a year, indicating portfolio trading frequency.

Soft Dollar Commission

An arrangement whereby a fund manager receives goods or services (such as research and analytical software) from a broker in exchange for directing trading orders to that broker.

Tracking Error

The measure of divergence between the investment performance of an index fund or ETF and the actual performance of its underlying benchmark index.

Swing Pricing

A valuation mechanism that adjusts a fund's NAV per unit to pass transaction costs associated with large investor subscriptions or redemptions onto the transacting shareholders.

Participating Dealer

An authorized financial institution that creates or redeems ETF units in large creation blocks directly with the fund manager to maintain market liquidity and align trading prices with NAV.

Indicative Net Asset Value (iNAV)

An intraday estimate of an ETF's fair value calculated and disseminated periodically throughout the trading day based on prevailing market prices of the underlying holdings.

Convertible Bond Arbitrage

A hedge fund strategy that exploits mispricings by taking a long position in an undervalued convertible bond while simultaneously shorting the underlying common stock.

Merger Arbitrage

An event-driven strategy that captures the spread in an announced acquisition by buying shares of the target company and short-selling shares of the acquiring company.

Formula Fund

A structured fund, typically closed-ended and passively managed, whose targeted return is calculated strictly according to a pre-defined mathematical formula tied to underlying assets or indices.