Wealth Management

Private Banking, Investment Decisions, and Structured Financial Products


  • Dimitris Chorafas, Independent Finance Consultant, France

This book has two themes: Private Banking and investment decisions regarding Structural Financial Products. Dr. Dimitris Chorafas examines in a rigorous way whether structured financial products are advisable investments for retail and institutional investors and, if yes, which risks they entail. As our society becomes increasingly affluent, and state-supported pension schemes find it difficult to survive, a growing number of high net-worth individuals, and families, have become retail investors – looking for ways and means to optimize wealth management, and Private Banking deals with these sorts of clients. Private banking also deals with clients that are institutional investors, such as pension funds, mutual funds, and insurance companies, as well as not-for-profits, foundations and companies explicitly set up for wealth management. Both institutional and retail investors are being offered by the banks they work with structured products. Typically, these are securities that provide them with a redemption amount, with may be either with full or partial capital protection, and some type of return. The book examines structured financial products, their polyvalent nature, and the results which could be expected from them.Return on structural instruments, which are essentially derivatives, is paid in function of a specific investment strategy on selected underlying asset(s). This essentially means on the performance of the underlyings, obtained by asset managers, which may be banks or hedge funds, through purchase or sale of embedded options. But there are risks. Both risk and return from structured products are related to three main issues: the volatility of future value of an underlying, the uncertainty of future events, and the exposure of the product. Every type of investment is subject to market forces, and the more leveraged a portfolio is, the greater will probably be both the assumed risk and the expected reward. The fact that structured financial products appeal, or at least are being marketed, to both retail investors and institutional investors makes the dual approach deliberately chosen in this book most advisable. This book addresses all these issues in a practical manner with numerous case studies and real-world examples drawn from the author’s intensive research.
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At the institutional side are the practitioners and professionals, from treasurers to operational executives, risk management officers and their staff, as well as auditors and financial analysts; investment consultancies; accountancies; auditing firms, independent rating agencies, and central bankers.


Book information

  • Published: November 2005
  • ISBN: 978-0-7506-6855-2

Table of Contents

PART ONE: PRIVATE BANKINGChapter 1: PRIVATE BANKING DEFINED 1. Introduction2. Private Banking Clients3. Organizational Challenges, Security and Secrecy4. A Private Banking Roadmap5. The Recycling of Household Debt Through Private Banking6. Synergy of Private Banking and Institutional Investors7. A System Approach to Wealth ManagementChapter 2: KNOW YOUR CUSTOMER AND HIS/HER PROFILE1. Introduction 2. The Sense of Professional Investment Services3. Wealth Management in Accordance to the Client's Profile4. Knowledge Engineering Is Assisting the Investor5. A Financial Advisory System for Currency Exchange6. Caveat Emptor and Accountability in Private Banking Chapter 3: BUSINESS OPPORTUNITY: FEES AND COMMISSIONS FROM PRIVATE BANKING 1. Introduction2. Trades, Investments, and Private Banking Customers3. Establishing a Strategy of Fees and Commissions 4. Different Types of Companies Have Different Strategic Aims5. Performance and Remuneration of Investment Managers6. Simulation of Portfolio Performance7. The Impact of Business RiskChapter 4: RISK AND RETURN WITH INVESTMENTS1. Introduction2. Basic Notions of Risk Assessment3. Prerequisites for Rigorous Risk Control4. Fine-Tuning the Philosophy of Investments5. Risk and Return with Implied Volatility6. Risk-Adjusted Pricing. An Example with Credit Risk7. An Introduction to Stress TestingPART TWO: ASSET MANAGEMENT Chapter 5: ASSET MANAGEMENT DEFINED1. Introduction2. Integrated Financial Markets 3. Asset Allocation Strategies4. Asset Allocation and the Shift in Economic Activity5. Real Estate Property Derivatives. A Case Study6. Passive and Active Investment Strategies7. A Critical View of Investment Strategies8. The Portfolio's Intrinsic ValueChapter 6: BUSINESS MODELS FOR ASSET MANAGEMENT1. Introduction2. Choosing the Investment Manager3. The Contribution to Asset Management by Contrarians4. Asset Management as an Enterprise5. Hedging Strategies Followed by Portfolio Managers6. Deliverables, Performance and the Administration of Assets7. Past Performance Is No Prognosticator of Future ResultsChapter 7: OUTSOURCING AND INSOURCING ASSETS 1. Introduction2. Risk and Return with Outsourcing3. Custody Only, Mid-Way Solutions, and Discretionary Powers4. Building Up the Investor's Portfolio5. Efficiency in Private Banking and in Asset Management 6. Conceptual Factors in Portfolio Management; the Option Model of Investing7. The Private Banking Profit CenterChapter 8: TRUST DUTIES AND LEGAL RISK1. Introduction2. Trust and Trustee Responsibilities3. Legal Risk and the Case of Tort4. Reasons Behind Legal Risk, and Cost of Litigation5. Legal Risk and Management Risk Correlate6. Mishandling the Client: Small Cases Which Can Lead to Legal Risk7. Big Cases of Legal Risk: Parmalat, its Investors, Auditors and BankersPART THREE: DERIVATIVE FINANCIAL INSTRUMENTS, STRUCTURED PRODUCTS, AND RISK CONTROLChapter 9: DERIVATIVE FINANCIAL INSTRUMENTS DEFINED1. Introduction2. The Changing Nature of Derivatives3. Underlying and Notional Principal Amount4. Derivatives Which Became Institutionalized5. Private Banking Derivatives6. Bank Capital Invested in Derivatives7. Dr. Alan Greenspan on Derivatives8. George Soros on DerivativesChapter 10: STRUCTURED FINANCIAL PRODUCTS 1. Introduction2. Structured Products Defined3. Structured vs Synthetic Products4. The Role of Strategists, Traders and Modeling Controllers5. Capital Protection. Real or Fancy?6. Adjustments and Redemptions of Structured Products7. The Illiquidity of Structured InstrumentsChapter 11: CONTROLLING THE RISK TAKEN WITH STRUCTURED PRODUCTS1. Introduction2. Credit Risk 3. Bond Spreads4. Liquidity Risk5. General Market Risk6. Market Volatility Risk7. Asset Protection from Volatility in Interest Rates8. Equity Derivatives and the "Greeks"PART FOUR: CASE STUDIES WITH THREE MAIN CLASSES OF STRUCTURED PRODUCTSChapter 12: FIXED INCOME STRUCTURED PRODUCTS1. Introduction2. Structured Notes Defined3. The Broader Horizon of Debt Securities4. Types of Fixed Income Derivatives 5. Capital Protection with Fixed Income Instruments6. Protected Interest Notes7. Secondary Markets as Indicator of Market DisciplineChapter 13: PRACTICAL EXAMPLES WITH FIXED INCOME DERIVATIVES1. Introduction2. Inflation-Linked Notes3. Real vs Nominal Interest Rates4. Capital Protected Notes5. Accrucal Notes6. Callable Reserve Floaters7. Stairway Notes8. Fixed and Variable Rate Notes9. Bull Notes10. Structured Instruments for Credit RiskChapter 14: EQUITY-TYPE STRUCTURED PRODUCTS1. Introduction2. Equity Derivatives3. Players in Equity Derivatives4. Speculation with Equity-Type Products5. Risks Taken with Analytics6. The Irrelevance of Book Value7. Case Study with Quoted Companies8. Case Study with Private Equity FundsChapter 15: PRACTICAL EXAMPLES WITH EQUITY TYPE DERIVATIVES 1. Introduction2. Absorber Certificates3. Early Repayment Certificates4. Enhanced Yield Certificates5. Reverse Exchangeable Certificates6. Potential Share Acquisition Certificates7. EUR Complete Participation Securities 8. US$ Non-Interest Bearing Note Linked to Equity9. The Price of IPOsChapter 16: CURRENCY EXCHANGE STRUCTURED PRODUCTS1. Introduction2. Currency Transactions and Economic Exposure3. Aftermath of Exchange Rate Volatility4. Structured Instruments on Forex Rates and Mismatch Risk5. Dual Currency Structured Products6. US$/Asian Currency Basket7. Stress Testing for Interest Rate and Forex RiskAppendix: DERIVATIVES AS A TAX HAVEN