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#Investments — 21.06.2016

Why Invest In Structured Products On Forex?

Nathalie Osphare-Druilhe

How to look for returns through forex strategy with foreign exchange-linked structured products.

In our previous posts, we introduced structured products and their key features . We demonstrated why they deserve to be included in portfolios as additional investment tool. We then mentioned the equity-linked structured products, the most widely distributed category of structured products. Does it mean equities are the only underlying asset class available for structured products? Not really… In fact currencies represent another large universe of underlyings allowing  a forex strategy through structured products.

What are the specific features of the forex market?

First of all, it is the most liquid financial market due to its very own nature: 24 hours a day, five days a week and Over the Counter (OTC) market. From an historical point of view, the forex market used to be the tool for hedging needs and deals. Of course it is still the case but for more than 15 years it has also been classified as a classical asset class to invest in for yield search.


What do forex structured products look like?

Forex structured products are very flexible investments since their investment horizon can be very short (from 1 week) to medium and long terms. Furthermore, they are used for various financial goals:  yield search, exposure - to a country or a financial sector through currencies - and hedging purposes.

Besides, forex structured products allow any kind of investment strategies - bullish, bearish, stable, range - due to the bi-dimensionality of the underlying, a currency pair, with opposite position on each part of the pair. The most  widely distributed foreign exchange-linked structured product in private bank industry is the Dual Currency Certificate. It is a simple tool on very short term maturity. It allows to earn an attractive yield compared to the risk free rate on the investment period. The condition is to take a possible conversion risk pre-determined by the investor.


Why invest in Forex  structured products?

Forex correlation to main other asset classes is quite low and its volatility level is generally halfway between low bonds volatility and high equity volatility levels. For instance, Forex  volatility on major currencies (G10 currencies) is  around 10% to 12%. Forex structured products can offer attractive levels of yield on very short term periods through moderate calculated capital risks.

It is hence suitable for medium risk return investors. In terms of portfolio management, investing in the Forex structured products can lower risks through decorrelation and diversification.