An accomplished business professional who has worked in a number of fields, Roland Bleyer suggests three key ideas taken from his introduction to structured finance.
There is no single definition of structured finance.
Structured financial products encompass the entire category of financial products that do not fall into standard offerings. They may include any combination of stocks, bonds, options, futures, currencies, commercial paper, or other investment choices. As such, it is difficult to generalize about the nature of structured finance.
Structured finance is essentially a problem-solving tool.
Structured financial products tend to be designed to solve specific problems. For instance, a product might be designed to maximize returns from a given asset within a given regulatory environment. Another might seek to reduce the risk of a given type of financial transaction or increase the credit available to a borrower without adding to the risk of the lender. In other instances, structured finance can be used to maximize the liquidity of a portfolio usually by decomposing it into tranches consisting of different levels of liquidity.
Structured finance often deals with nonlinear systems.
Nonlinear systems are those for which first-order relations between variables cannot be established. For instance, certain universal life insurance policies guarantee a minimum return while also allowing policy holders to profit from increases in the underlying value of the policy. The lifespan of the policyholder and the performance of the policy’s underlying assets are highly nonlinear. Structured financial products, therefore, are needed to ensure that the insurer continues to earn a profit while still fulfilling obligations to policyholders.
