When creating a structured product, the investor defines a certain number of characteristics to the issuer. Among these is the intended subscription amount or collection intention, which is the initial amount the investor plans to invest in the product. However, this amount is not final — it can be increased or decreased later. But if the initial amount is reduced, this may incur costs.
When an investor wants to create a structured product, the issuer must protect against risk — hedge —accordingly. The issuer inherently bears the risk opposite to the investor's bet. For example, in an Autocall where the investor bets on an increase in the underlying asset, the issuer will need to buy and sell options and a certain quantity of the underlying asset. The issuer cannot rely on the market outlooks of different investors. The goal is to make a margin at the product's launch and to maintain or even improve it through good risk management, depending on market fluctuations.
The minimum subscription intentions depend on the investment vehicle chosen by the investor and the issuer's capacity. Issuers often offer products starting at €50,000, which can be subscribed to in securities accounts. For French life insurance contracts, typically between €500,000 and €1,000,000 minimum is required, depending on the company. For Luxembourg life insurance contracts, the minimum amount is more flexible, usually between €100,000 and €250,000.
However, an investor who cannot gather the necessary amount can group together with other investors to meet the required collection.
For various reasons, the investor may not collect the full amount of their initial intention. In this case, at the end of the commercialization period, the uncollected amount that has already been hedged by the issuer will need to be unwound — cancelled — and potential costs will be incurred by the investor. If market parameters at that time are favorable, this can generate a gain for the issuer. This gain is generally not returned to the investor but kept by the issuer for the risk they took. Conversely, if conditions are unfavorable, the issuer records a loss. Depending on the committed amount and the relationships between the issuer and the investor — or the intermediary between issuer and investor — the loss will be deducted from the distribution fees, shared, or cancelled.
Generally, the investor has visibility throughout the commercialization period on the amount subscribed by end clients. Thus, it is possible to anticipate and allow other investors to invest in the product to fill the initial enveloppe and avoid potential costs.
However, investors manage their risks, and the percentage of cases where collections are not met remains low.
During the commercialization period, it is common for the enveloppe to be oversubscribed, either by the initial investor or by other investors to whom the product was presented. In this case, the issuer will need to hedge an additional amount based on current market conditions. Since an investor cannot be penalized compared to another, the only variables that can be impacted are the distribution fee — upfront — and, more rarely, the subscription price. If the market has declined since the product's launch and volatility has mechanically increased, the remuneration increases. Conversely, if the market has risen and volatility has decreased, the upfront will likely be lower.
The initial reference level of the underlying asset — strike — can be set on the product launch day during or at the end of the commercialization period. As long as no strike is defined, the upfront's sensitivity to market fluctuations is lower. This is why in large life insurance collection campaigns, the strike is set at the end of the commercialization period.
The volatility of the underlying asset, its potential dividends, and interest rates impact the price but not the rise or fall of the underlying asset per se.
Once the initial level is defined, the product remains sensitive to fluctuations in these parameters but also primarily to the underlying asset's performance. For a bullish product, if the underlying asset performs well from its strike, it is less attractive for the distributor to continue the collection because their upfront will be lower. In the case where the collection is lower than expected, the potential loss is also lower.
When an investor wants to create a structured product, the issuer must protect against risk — hedge — accordingly. For various reasons, the investor may not succeed in collecting the full amount of their initial intention. In this case, at the end of the commercialization period, the uncollected amount that has already been hedged by the issuer will need to be unwound. Conversely, it is common for the envelope to be oversubscribed, either by the initial investor or by other investors to whom the product was offered. In this case, the issuer will need to hedge an additional amount based on current market conditions.
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