There has been a number of structured products that which have lost significant amount in value. Some of these structured products were sold by banks, some by fund houses and others by insurers as single premium ILPs. There are also some sold by FA representatives as introducers. Many of these investors are seeking for advice on what to do. One of the most common advice is this: The product is meant to hold to maturity, therefore the price will go up to $1 when it mature. Really? Without going in depth into the exact details of the product, I don’t think it will ever go up to $1.

Considered a structured note that is now having NAV of $0.20. The par value is $1. If the maturity period is 4 years from now, what is the return required to grow it to $1? It will require 49.53% per annum! Is there such investment in the world that can give such a guaranteed return? If this is true, it is possible for a buyer to buy at this price and earn a risk free return of 49.53% pa! Wa… I also want to buy. Now, I know many people will say that most of these structured products are closed ended fund. So it is not possible to buy the fund.  No worries, there are many desperate sellers who wants to exit the fund if the NAV is slightly better. Therefore, a buyer can find a willing seller and pay slightly more than the NAV to the seller (so that the seller is willing to sell). Is this legal? Of course it is legal. It will be legal if it is under contract law.

For a contract between two parties, there must be an offer and there must be an acceptance. Moreover, there must be consideration (money exchange). So if there are two parties – the buyer offers to buy at NAV+10% (example) to the seller and the seller accepts, the contract is sealed when the buyer pays the seller the agreed payment. When the product matures, the seller is contractually obligated to pay the buyer whatever the maturity value of the product. So here we have a mechanism for the buyer to buy at the most attractive investment product in the world! For single premium ILP, it is much easier. No need to setup a contract. The seller just need to do an absolute assignment of the policy via his insurer to the buyer. The buyer just need to pay the seller the agreed amount. Upon maturity of the ILP, the proceeds will automatically go to the new owner.

So now, those who thinks that the NAV will go up from $0.20 will go up to $1 has a way to enjoy this super return! So what are people waiting for? People are not stupid, nobody is doing this because the structured product’s value is the fair value. There is no fantastic opportunity here. If it is guaranteed that the maturity value is $1, than the price currently is merely a present value of the maturity value. The discount rate to be use is the risk-free rate which is currently 0.99% per annum (based on 01 Apr 2013 maturing SGS bonds). Therefore the NAV should be = $1/(1+0.99%)^4 =  $0.96. I use SGS bonds as the discount rate because if the “guarantee” is absolute certain that the product will mature at $1, than the discount rate based on the risk free SGS is suitable. It can be seen that the $0.20 is far from $0.96.

The next time a financial adviser tells you to wait for your 20 cents structured product to mature at $1 within the next few years, tell him that you will sell the product to him at a 10% premium. That financial adviser will run away from you and never contact you again.