The strength of a Capital Protected product lies in its flexibility and tailored approach to investing. In their simplest form, Capital Protected products offer investors full or partial capital protection coupled with equity-linked performance and a variable degree of leverage. They are commonly used as portfolio enhancement tools to increase returns while limiting the risk of capital loss.
Equity derivates can be extensively customized to meet a specific investor’s risk/return profile and investment objectives. These objectives may include capital protection, diversification, yield enhancement, leverage, regular income, tax/regulation optimization, and access to non-traditional asset classes, among others.
The most common Capital Protected product comprises two components:
- A fixed income security, the zero-coupon bond, which guarantees that part or all of the invested principal will be reimbursed.
- An option-like instrument, which provides a payoff in addition to the fixed income payments. This additional payoff is linked to the performance of an underlying asset, taking the form of either regular coupons or a one-off gain at maturity.
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