What is typically a risk involved with structured products?

Structured products are investment instruments created by financial institutions, combining various components such as derivatives and often linked to the performance of an underlying asset or index. One of the significant risks associated with these products is counterparty risk, which arises from the possibility that the issuing financial institution may default on its obligations. Since structured products are typically not exchange-traded, their performance heavily relies on the creditworthiness of the issuer. If the issuer encounters financial difficulties, investors may face losses, even if the underlying asset performs well.

Understanding counterparty risk is crucial for investors. Unlike traditional investments such as stocks or bonds, where ownership is more straightforward and tied to established markets, structured products can introduce complexities regarding who is responsible for payments and returns. The reliance on a single entity to honor the terms of the product makes counterparty risk a key consideration.

Recognizing the potential for counterparty risk emphasizes the importance of conducting thorough due diligence on the issuers of structured products, evaluating their financial health, and understanding the terms of the investment before engaging. This cautious approach can help mitigate the dangers associated with investing in structured products.