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Structured products are a hugely profitable business line for investment banks. They allow banks to package up risks and pass them on to third parties in the form of an investment where the buyer may win or lose, but the seller always stands to gain.

The enormous success of firms such as Société Générale and BNP Paribas, which have for many years leveraged their strengths in equity derivatives into the structured products and generated handsome profits, has prompted every major investment bank to try to get into the market.

With more players, the business has moved into new areas. As well as equity-based products, deals linked to fixed income, foreign exchange and commodities have also become widespread.

At the same time, structured products have become much more popular with investors because of the potential for enhanced returns that they can offer in a low-yielding, low-volatility environment. It’s hard for an investor’s eye not to be turned by a deal offering a guaranteed return of 6%, even if it is for a limited period.

That’s what investors were offered in a spate of structured issues that came to the market in a 12-month period beginning in the first half of 2004.

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