Glossary D to H
D
Derivatives
– these are futures and options that are traded on the LIFFE market. Options can be either a ‘put’ or ‘call’. Professional investors and traders buy and sell the futures and options and combine them to develop investment opportunities.Dow Jones EuroStoxx 50
– this is an index of the 50 largest stocks in mainland Europe put together by US information provider Dow Jones. Many structured investment products are linked to this index.Dublin
- Many structured investments offered in the UK make use of Close-ended Investment Companies. These companies are often corporate entities that are registered in foreign centres such as Dublin since these centres often provide a more flexible environment and lower tax charges. Dublin has been used since 1995 and has been used by a large number of UK product providers to create structured investments since the shares of these companies qualify for both PEPs and ISAs.F
Fees and charges
– this is the cost of managing the plan and is worked out when the product is designed, and is reflected in the investment returns offered. So, the returns you get from your investment have already had the charges taken off and you don’t have any fees to pay.Financial Services Authority (or FSA)
– this is an independent organisation, which is not linked to the Government and is given its statutory powers by the Financial Services and Markets Act 2000. All UK-based IFAs and providers of structured investment products must be registered, authorised, and regulated by the Financial Services Authority.Financial Times Stock Exchange (FTSE) 100
– this is an index of the UK’s 100 largest companies listed on the London Stock Exchange. This is a popular index for structured investment products.Futures
- A futures contract is a form of derivative contract, typically traded on a regulated exchange. The contract allows the buyer for example, to fix a price now for the underlying at a set date in the future. If the price on that date is higher than the purchase price of the futures contract then the buyer will make a profit but conversely if the price is lower then he will make a loss. Profits and losses are exactly proportional to the size of the futures position and the final level of the underlying.Typical futures contracts are referenced to equity indices such as the FTSE100 or S&P500, government bond prices such as Gilts, and interest rates such as LIBOR.
G
Gearing
– a number of products have a level to which the basket of shares or index or indices (to which it is linked) can fall before your original investment is at risk. Gearing comes into play if the shares or index falls below this safety margin, and fails to recover to the initial or hard protection level before the final measurement date. It refers to the amount by which the shares or index has fallen and is then multiplied when working out the capital return. For example, if a product is geared at 2% for every 1% that the index falls (having broken the safety margin), and the index falls by 25%, you would lose 50% of your original investment, ignoring any growth due or income already paid.
Growth product
- A growth product is a type of structured investment that produces all its return at maturity with no payments of income during the product term. A growth product is usually 100% capital guaranteed.
Guaranteed bond or Guaranteed Equity Bond (GEB)
- A product which carries a minimum return at maturity which is clearly defined at the outset. This is usually at least equal to the sum invested (100%). However, care should be taken to consider the nature of the guarantee. Some issuers of GEBs guarantee based on the balance sheet of the issuer (where a rating is useful) and some, particular deposit taking building societies, only provide a guarantee based on the Bank of England for deposits. This is limited such that in the event of a crisis, for larger investments, above c. 33,000 sterling, you will NOT get all your money back. This should be a crucial factor particularly for charities and pensions schemes when considering the issuer of GEBs.H
Hard protection
– if the basket of shares or index falls below the soft protection level (or safety margin), the basket or index must rise again to a certain level to make sure your original investment is not at risk. This level is either the starting level or if lower is referred to as the hard protection level, which is often set at either 90% or 95% of the opening level.High-income products
– these pay out a rate of return each year well over that which you could get from a deposit account. As a result, there is a higher degree of risk. In other words, if the underlying market falls significantly, you are likely to lose more of your initial investment than you would with a low-risk product, which pays a lower rate of return.Himalaya product
- This is a type of growth product that is usually linked to a basket of indices. The return is calculated as the average of the performances of the best index in each specified period during the term of the product. Once an index has been selected, it is then removed from the basket for remainder of the term of the product.Historic Volatility, or Vol
- The historic volatility of an asset is a mathematical measure of its variability during a given historical period, for example the last 6 months. The most common form of measure is the standard deviation of the daily returns.Historic volatility is usually quoted as a percentage figure and is simply a means of measuring the relative riskiness. Thus an index or share with a higher historical volatility, such as the NASDAQ100, will be regarded as more risky than one with a lower volatility like many hedge funds.