Why would anyone buy a structured note?

[FreeGoldRush]

Structured notes can offer "interest" of 30% or more. There are thousands of them, they are frequently callable and downside protection often goes away if some underlying asset falls more than X% by some date. They are basically side bets that are tied to an asset. If a bank like JP Morgan is selling a structured note they have math PhDs that have calculated the odds are in the banks favor. There is no value creation here, only a value transfer. It's like placing a complex bet at a race track.

Since the odds are never in your favor why would someone buy a structured note instead of just holding cash? Do people just like to speculate with them? There does not appear to be a mathematically correct reason to hold these.

 

[newwurldmn]

Structured notes can offer "interest" of 30% or more. There are thousands of them, they are frequently callable and downside protection often goes away if some underlying asset falls more than X% by some date. They are basically side bets that are tied to an asset. If a bank like JP Morgan is selling a structured note they have math PhDs that have calculated the odds are in the banks favor. There is no value creation here, only a value transfer. It's like placing a complex bet at a race track.

Since the odds are never in your favor why would someone buy a structured note instead of just holding cash? Do people just like to speculate with them? There does not appear to be a mathematically correct reason to hold these.

the expected value is negative but you can’t structure the risk profile yourself. The bank will take the note break up the risks and hedge them out. The holder of the note won’t do that and will get a payout profile they want.

 

[FreeGoldRush]

the expected value is negative but you can’t structure the risk profile yourself. The bank will take the note break up the risks and hedge them out. The holder of the note won’t do that and will get a payout profile they want.

The expected value is negative as you said. So why get into one? Just hold cash.

 

[FreeGoldRush]

Here's an example. What is the best case for why you would hold this? I understand "speculation" is a reason but that's not what I'm looking for. Is there a mathematical advantage to holding something like this instead of cash if viewed over a large sample size?

https://www.sec.gov/Archives/edgar/data/19617/000121390021063442/s134648_424b2.htm

 

[newwurldmn]

The expected value is negative as you said. So why get into one? Just hold cash.

Firstly since notes went open platform, the edge loss is tiny (like sub 1percent). You can’t structure those payouts yourself. So if you want the payout you have to trade the note. Often you won’t even notice the edge loss because it will be embedded in the cost of carry (JPM carries at fed funds and you pay liver plus 100). But you can’t structure the note anyway.

I made a lot of money in them in 2003-2008. I haven’t done any since because with lower interest rates I couldn’t get the payouts I wanted.

 

[newwurldmn]

Here's an example. What is the best case for why you would hold this? I understand "speculation" is a reason but that's not what I'm looking for. Is there a mathematical advantage to holding something like this instead of cash if viewed over a large sample size?

https://www.sec.gov/Archives/edgar/data/19617/000121390021063442/s134648_424b2.htm

On a risk neutral basis no. But in the world of risk neutrality and portfolio replication you can’t earn more than the risk free rate anyway.

while markets were rallying a lot of rich people made a lot of money in autocallables. But they lost a lot when the market crashed in 2008. I personally never liked those.

 

[maxinger]

NO COMMENT unless you post a chart.

 

[SoyUnGanador]

Firstly since notes went open platform, the edge loss is tiny (like sub 1percent). You can’t structure those payouts yourself. So if you want the payout you have to trade the note. Often you won’t even notice the edge loss because it will be embedded in the cost of carry (JPM carries at fed funds and you pay liver plus 100). But you can’t structure the note anyway.

I made a lot of money in them in 2003-2008. I haven’t done any since because with lower interest rates I couldn’t get the payouts I wanted.

I ain't paying my liver to ANYONE, that is where I draw the line!

 

[ajacobson]

State-regulated entities - like insurance companies that get murdered on their statutory requirements - who want equity exposure.
ELKS - equity-linked notes. Treated as bond by most states.

 

[MrMuppet]

Firstly since notes went open platform, the edge loss is tiny (like sub 1percent). You can’t structure those payouts yourself. So if you want the payout you have to trade the note. Often you won’t even notice the edge loss because it will be embedded in the cost of carry (JPM carries at fed funds and you pay liver plus 100). But you can’t structure the note anyway.

I made a lot of money in them in 2003-2008. I haven’t done any since because with lower interest rates I couldn’t get the payouts I wanted.

could you shed a bit more light onto these? I never did structured products outside the EU and only traded those that I could find a replication by myself (e.g. options and NDFs). For me the biggest problem always was that the bank would cancel the trade once they figured they had mispriced the product.

It's actually prohibited to do so but you know...they have 200 lawyers and I have one. So I looked somewhere else.