Risk Management and Structured Notes

Structured notes have become a focus of controversy lately due to the much-publicized losses sustained by investors who were caught off guard by the reversal in the trend of interest rates. Since structured notes are relatively new and not as well known as other, more traditional, investment options in the past few years, it is important that people should be educated about this instrument. Structured notes offer issuers and investors a vehicle to isolate and redistribute specific risks. Pricing the derivative component of structured notes requires the same level of processing on the part of investors. This paper will introduce common structures of risk and explain the type of analysis in which investors should engage both prior to and subsequent to purchase. It is intended to (1) ascertain the nature and characteristics of structured notes, (2) to examine the risks inherent in structured notes, and (3) to recommend some risk-managing strategies when investing in structured notes. The complexity of the structured-notes market would pose a challenge to the risk- taking investors.