How to Read a Structured Product Term Sheet
Every structured product is an option you sold, wearing a costume. This is how to find the option, price it yourself, and see what the payoff diagram left off the page.
The one method that works on every structure
Structured products come in dozens of names — autocallable, reverse convertible, bonus, discount, capital protected — and every one of them decomposes into the same three ingredients:
$$ \text{Product} = \underbrace{\text{a bond}}_{\text{issuer credit}} \;+\; \underbrace{\text{options bought}}_{\text{your upside}} \;-\; \underbrace{\text{options sold}}_{\text{how it is funded}} $$
- The bond is the issuer's promise. It is unsecured debt, and it fails when the issuer does, whatever the underlying did.
- The options you bought are the headline: the participation, the coupon, the buffer.
- The options you sold are how all of that was paid for. They are never in the headline, and they are the whole risk.
Read every term sheet with one question: which option did I sell, and what was I paid for it?
1. The identity page: who owes you the money
- Issuer — the legal entity, not the brand. A finance subsidiary with a parent guarantee is a different credit from the operating bank.
- Guarantor, if any, and whether the guarantee is unconditional.
- Ranking — senior preferred, senior non-preferred, or subordinated. Post-2016 this determines where you sit in a bail-in, and the difference is large.
- Is it a note or a deposit? A structured deposit keeps deposit-guarantee eligibility on the principal; a structured note does not. Same payoff, entirely different position in a failure.
2. The underlying: what is actually being tracked
- Price index or total return index? Almost always price. On a 3%-yielding market that is 3% a year of dividends accruing to the issuer, not to you — over five years, roughly 16% of return that never enters the calculation.
- Single stock, basket, or worst-of? A "worst-of three" pays on whichever underlying performs worst. That is not diversification; it is selling correlation risk, and it is the single most under-priced term in retail structures.
- Currency treatment — unhedged, composite, or quanto. Three different products under similar wording.
- Observation dates and averaging. An average of twelve monthly observations is worth materially less than the closing level, because averaging cuts effective volatility and therefore the option's value.
3. Finding the option you sold
| If the term sheet says… | You sold… |
|---|---|
| "Attractive fixed coupon" | A put, usually with a barrier — see reverse convertible |
| "Discount to the current price" | A call, capping your upside — see discount certificate |
| "Bonus level, provided the barrier holds" | A down-and-in put — see bonus certificate |
| "Capital protected, participation 60%" | Nothing — you gave up the coupon instead. See structured deposit |
| "Autocall at 100% with memory coupon" | A put plus your own upside beyond the coupon — see autocallable |
| "Cap at 130%" | A call struck at 130% |
4. Price it yourself — the step that changes everything
- Take the components to the strategy builder or the Black–Scholes pricer, using the underlying's implied volatility and the current risk-free rate.
- Value the bond leg: the discounted redemption at the issuer's own funding rate — not the risk-free rate. An issuer paying 4% on its senior debt is borrowing from you at 4%.
- Add the options bought, subtract the options sold. Compare the total to 100.
- The gap is the issuer's margin, taken up front. Independent studies of retail structured products have repeatedly found it in the range of 1.5–4% of notional, and it does not appear as a fee anywhere in the document.
5. The scenarios the brochure does not chart
- The flat market. Most brochures chart a rise and a crash. The case where the underlying goes nowhere for five years is the most likely one and the least illustrated.
- Early redemption. An autocall that redeems in year one returns your money with one coupon — and reinvestment risk you did not plan for. Success and disappointment look identical here.
- The barrier touched then recovered. For a European barrier this is irrelevant; for an American one it is decisive. The document says which, in one word, and that word is worth more than the payoff chart.
- Selling before maturity. The issuer is usually the only buyer, and the price is theirs to make. Check whether a secondary market is promised or merely expected.
The checklist, in the order it matters
- Who is the issuer, and where do I rank?
- Which option did I sell, and what is it worth?
- Price index or total return — how much of the underlying's return never reaches me?
- Worst-of? If yes, I sold correlation, which is the term least likely to be adequately compensated.
- European or American barrier, and what does the touch probability say?
- What happens in a flat market, and what does the plain alternative pay in that case?
- What is my exit before maturity, and who sets that price?
Information and education only. This page explains how to analyse a document type. It is not advice, not a recommendation for or against structured products, and every figure is illustrative. The issuer's own final terms and key information document govern any actual product.