CMFAS CM-SIP Structured Products & Structured Notes question: liquidity risk considered significant

CMFAS CM-SIPStructured Products & Structured Notes

Why is liquidity risk considered significant for most structured products?

A They are built to be held to maturity, with a thin secondary market and early exit often well below par
B They are listed and trade continuously on SGX, so an investor can sell at a fair price at any time
C The issuer must redeem them at par on demand, which can drain its cash if many investors exit at once
D They pay daily coupons that the investor can withdraw at any time, so balances fluctuate

Show the answer and explanation

Answer: A. They are built to be held to maturity, with a thin secondary market and early exit often well below par

Structured products are usually meant to be held to maturity; any early exit is at an issuer/market-maker price that can be well below par, so selling early can turn a 'protected' product into a loss.

Common mistake

Assuming structured products are as liquid as listed shares.

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CMFAS CM-SIP Structured Products & Structured Notes question: liquidity risk considered significant

Answer: A. They are built to be held to maturity, with a thin secondary market and early exit often well below par

Common mistake

Related CMFAS CM-SIP questions

CMFAS CM-SIP Structured Products & Structured Notes question: liquidity risk considered significant

Answer: A. They are built to be held to maturity, with a thin secondary market and early exit often well below par

Common mistake

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