In Part 1 of this series, we have mentioned that Structured Notes are highly customizable. This diversity can lead to financial hazards if the risks of these products are not well understood by the investor.

When an investor is looking at the prospectus of a new type of Structured note, the first challenge is to understand the features of the payoff, how the product behaves in different market scenarios, and what the main risk factors are. Even simple products can reveal a high level of complexity.

Let’s look again at the example described in Part 1 of this series:

Tenor: 3 months
Underlying: Stock ABC
Reference Price: Stock ABC $10
Strike Price: $8
Coupon: 12% p.a.

Recall the two scenarios at maturity for this structured note:

Scenario 1: If ABC