TABLE OF CONTENTS Equity derivatives are structured products promoted as a better alternative to directly investing in equities. Their stated goal is to help the investor participate in performance of individual companies quoted in the exchange. The pros say that direct equity investments do not guarantee fixed returns, nor do they provide capital protection, while equity derivatives do. This is a rather loaded statement, which fails to take into account the equity derivatives risks.
To gain perspective, the reader should know that banks and hedge funds have developed a number of structured products as alternatives to direct investment in equities. Table 14.1 lists some of the most important. This is only a sample of what is currently available in the market. New equity-type structured products spring up almost daily, many being designed according to specifications by institutional investors, or even by high net worth individuals.
| Instrument | Characteristics | Underlier | Secondary market |
|---|---|---|---|
| Certificates of securitized equities | Investment in an equity index, or basket of certificates consisting of shares meeting criteria such as country, industry etc. A variety is dynamic certificates with investment in an index or equity basket whose composition is subject to change | Different equity indices and different company stocks | Rather liquid secondary market for purchase and sale, with bid/offer spread of about 1% and fees similar to those for equity investments |
| Certificates on underlying's performance | Equity investment in the underlying performance, plus possible capital protection at end... |
