Introduction

In the third chapter of the latest iteration of the SRP Index report we look at the use of thematic indices in the structured products market. Thematic indices remain a focus for innovation as product providers and investors as they provide exposure to the performance of companies associated with particular structural themes, trends and concepts.

Thematic indices are developed to gain access to growth stories shaping the future of economies and societies and have established themselves in the structured products market on the back of increasing issuance and sales.

In this chapter we also look at the use of decrement overlays in indices sold in the structured products market.

This overlay has become an effective feature of underlyings used in structured products by banks as they remove most of the dividend risk and offer higher coupons to investors.

However, there are issues around the use of decrement that must be addressed by product providers such as the level of the decrement, the use of fixed points decrements versus percentage decrements and the risk management of the issuance of decrement products as for manufacturers the spread in volatilities (due the difference of composition) between the decrement index and the liquid index adds dividend risk due to the volatility skew of the liquid index.

structuredretailproducts.com