A guide to securitised derivatives

If you’re looking to delve into a different form of investment then securitised derivatives can be an option for you. Preferably it would be best to trade in these complex instruments if you have prior experience.

This guide will focus on the securitised derivatives that are on offer that you can trade-in. However, any income from them is not guaranteed as with any investment that you create. You should always be prepared for investment losses and remember that past performance does not correlate to future performance.

Securitised Derivatives… What are they?

Securitised derivatives, or “securitised products”, refer to financial products whose value and cash flows are derived from underlying assets such as loans (mortgage-backed securities), credit card receivables (credit card receivable securitisation), and corporate debt (asset-backed securities). Because of their lower credit risk, the riskier assets from these classes of securitised products are usually pooled and then resold to investors. These products can be either fixed-income securities (these are called “collateralised debt obligations”) or equity securities (these are called “collateralised loan obligations”).

The most common type is an option, which gives the buyer the right, but not the obligation, to buy or sell an asset at a specified price on or before a specified future date. A security is a tradable financial asset. The investor does not have to hold a security until maturity if he does not want to. He can sell it at any time before the maturity date. However, an investor can also benefit from a security by holding it to maturity.

The securitised derivative products available to investors have their characteristics, including their risks, so you must fully understand what consists of these vehicles and how they are traded.

Securitised derivatives can be volatile so they may not be suitable for most investors and so you should seek independent financial advice to make a final decision.

A guide to securitised derivatives

Securitised Derivatives Basics

Listed below is a description of each of the securitised derivatives that are available:

  • Cover Warrants – Covered warrants are options to buy or sell an underlying asset at a specific price before an expiration date. This gives investors the right to buy or sell a specific amount of shares in a specific stock. Covered warrants have a finite lifetime, unlike stock options, which are open-ended contracts.
  • Turbos – Turbos allows you to figure out the upward and downward movement of equities, shares and indices that it is linked to. At no extra cost to the investor, they include a knockout barrier which means that you cannot lose more than the initial stake due to the contract automatically closing if it surpasses the knock-out barrier.
  • Traditional Warrants – The traditional warrant is a financial product that gives an investor the right, but not the obligation, to buy securities at a specified price and time. It is very different from a regular stock option because the traditional warrant investor can see if the value of the underlying security goes up or down.
  • Structured Products – A structured product is an investment product that is created from a package of financial assets, and that combines the asset types (stocks, bonds, commodities, etc.) into a new investment. The goal of a structured product is to create an instrument with special risk/reward characteristics that can’t be obtained through investing in the individual asset classes. With structured products, investors have the advantage to lock in gains if the market rises or control losses if it falls. However, the complexity of this type of derivative means that only experienced traders should manage trading in this sort of instrument.

The complicity of all securitised derivatives means that investor’s knowledge and experience in financial trading will firstly be assessed before they can enter the market. Due to the securitised derivatives risks and financial trading assessment, investors may find that they cannot manage these investment types.