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What is Structuring?

duyong.lee

duyong.lee

Joined
3/11/14
Messages
8
Points
13
Hi, I have been curious about "structuring" in investment banking industry.

I thought financial engineering would be fitted to design a basket option and this is what people call as structuring.

Could someone breifly explain what sturucting does, whether financial engineering skills are main methodology for it?
 
From my understanding, "structuring" means designing basket of options to satisfy the client's needs. Ie, designing and pricing exotic options. Then the traders would be in charge of hedging the position. @JuanisimoSanaz could explain it better.
 
diegosanaz said:
From my understanding, "structuring" means designing basket of options to satisfy the client's needs. Ie, designing and pricing exotic options. Then the traders would be in charge of hedging the position. @JuanisimoSanaz could explain it better.
Click to expand...
Structuring goes way beyond options and involves the specifics of a client's need across all dimensions: currency, booking entity, country, duration, industry, tax position, etc. etc. Its definition will vary widely by business. In commodities markets, it is something very different from that seen in rates markets.
 
Ken Abbott said:
Structuring goes way beyond options and involves the specifics of a client's need across all dimensions: currency, booking entity, country, duration, industry, tax position, etc. etc. Its definition will vary widely by business. In commodities markets, it is something very different from that seen in rates markets.
Click to expand...
Agree in 100%.
Another question here which havent't been pointed out in Ken's post: does structuring (or more precisely structured products) always guarantee the return of initially invested capital?
 
Thank you all above.
Another questions regarding structuring.

Since the financial crisis at 2008, I have heard that the size of market and demand of complex structured products has been rapidly diminishing. Assuming we are back on uptrending economy, Would anyone expect this market will get attentions back?
 
duyong.lee said:
Thank you all above.
Another questions regarding structuring.

Since the financial crisis at 2008, I have heard that the size of market and demand of complex structured products has been rapidly diminishing. Assuming we are back on uptrending economy, Would anyone expect this market will get attentions back?
Click to expand...
It has recovered to some extent, varying by product area. This has gotten a lot of press in the last few weeks.
 
Ken Abbott said:
It has recovered to some extent, varying by product area. This has gotten a lot of press in the last few weeks.
Click to expand...

Could you give me one of example? and what advice would you want to give a FE student seeking a job in designing structured products? Thanks.
 
There's a type of investment called Auto-Call, it is based on an underlying stock, let's say Apple.
It works as a fixed income product, meaning it pays interest, but mostly it is quarterly. (Say 10% rate, paid 4 times a year), however there are price thresholds on this product. Let's say starts at 100.00, and they have a 20% downward protection and a 10% threshold up.
If the stock is trading within 80-110, you will get the coupon, if it's below 80, you will not receive payment for that quarter. If it's above 110, it is called automatically and you get that quarter's interest plus all your principal back.
They have specific time frames, usually 1-3 years. Another feature they have is that if at the end of the cycle, it's below a certain price, you will get the stock instead of your principal back.

That's an example of a structured product that's gained in popularity. The people who put them together structure them and also hedge their positions accordingly.

Why do these products exist? There's client demands for them, and banks have to try and satisfy them.
 
@Fer Carranza , @Ken Abbott
These are really interesting topics. Thank you for providing!

Especially, ISDA's new regulation of amending "Credit trigger events" is very attractive news to quants in risk management, including myself.
 
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