Structured Notes FAQ
Oasis Investment Solutions

A structured note is issued by a bank and linked to a reference asset under a predefined payoff formula set at issuance. In simple terms, the investor is lending money to a bank under terms that make repayment depend on both market outcomes and the issuer's solvency.

It is not a deposit, not a fund, and not protected by deposit insurance. Economically, it combines a bond component with an embedded derivative that creates the customised payoff. Unlike a fund, a structured note does not hold the underlying assets on behalf of the investor; it is a contractual claim on the issuing bank.

Sources: SEC Office of Investor Education — Investor Bulletin: Structured Notes.

Banks issue structured notes to raise funding, transfer specific risks, and earn structuring and hedging margins. The investor receives a predefined payoff profile, but that does not mean the structure was designed primarily around the investor's objective.

Some structured notes are designed around a genuine portfolio need. Others are designed around issuer economics and distribution. The right question is not whether the terms look attractive, but what risk is being transferred, how it behaves, and whether it belongs in the portfolio.

The payoff is the price of the risk you are taking.

A structured note can be linked to different underlyings subject to issuer hedging capacity, market liquidity, and regulatory constraints.

The underlying affects both the price of the note and the risk being transferred to the investor. Two notes may look similar, but the underlying's volatility, concentration, and correlation can materially change both the probability of loss and the way losses unfold.

A structured note delivers a predefined payoff formula fixed at issuance. An AMC is a certificate linked to a managed portfolio, so its performance depends on portfolio evolution and the investment decisions made over time.

In practice, an AMC is used when an investment strategy requires active or passive management, rebalancing, or multi-position implementation within a bankable security. Depending on the issuer and platform, AMCs may offer daily valuation, integration into existing custody and reporting infrastructure, and a faster route to market than launching a separate fund or operational structure.

A capital-protected structured note is designed to repay principal at maturity even if the underlying performs poorly. The protection is real only if two conditions hold: the issuer can pay, and the investor holds the note to maturity.

Economically, many capital-protected notes combine a bond component, typically a zero-coupon bond, with an option component that creates the market-linked upside. This is why interest rates matter: higher rates reduce the bond's cost today and leave more budget for optionality; lower rates consume more budget in the bond and reduce upside participation.

Before maturity, the note is valued in the secondary market. Its price can move with interest rates, volatility, issuer credit spreads, and liquidity. As a result, even a capital-protected note can trade below par before maturity, and an early sale can realize a loss.

A structured note's coupon is one output of the note's overall pricing. The issuer sets it so the package can be funded and hedged under prevailing market inputs.

The main inputs are implied volatility, interest rates, dividends/carry, issuer funding levels, and the cost of the embedded options. Downside mechanics also matter: a lower barrier, a maturity-only barrier, or a low-strike structure will not price the same as a daily knock-in barrier.

Higher implied volatility can support higher coupons because the investor is often being paid to absorb more downside or event risk. But that higher coupon is not "free yield." It is compensation for risk embedded in the payoff terms.

The key point is simple: the coupon is the result of the risk being transferred to the investor, not proof that the note is attractive.

A contingent coupon depends on a predefined condition. In most structures, the underlying must close at or above the coupon trigger on the relevant observation date. If the condition is met, the coupon is paid. If not, the coupon is missed.

What happens to a missed coupon depends on the memory feature. In a memory structure, the missed coupon is carried forward and may be paid later if the coupon condition is met on a future observation date. Without memory, the missed coupon is lost.

A step-down coupon trigger can improve the probability of future payment. In these structures, the required coupon level declines on predetermined observation dates, making the condition easier to meet over time. This can help recover missed coupons in a memory structure, but it does not guarantee recovery.

The key point is simple: memory changes the treatment of missed coupons; it does not create an unconditional right to payment. A contingent coupon remains conditional until the required trigger is met.

An autocall is an early redemption feature. If the underlying meets the autocall condition on a scheduled observation date, the note usually redeems at par plus any coupon due, subject to the note's terms.

The key question is whether the outcome was attractive relative to the time invested. A note may redeem exactly as designed, but the investor still needs to assess the annualised return, the risk taken, and the reinvestment environment. At portfolio level, the issue is not only whether one note redeemed early. The broader question is how repeated autocalls affect expected duration, future income, and the ability to redeploy capital efficiently.

An autocall is a designed redemption event, not automatically an investment success. Its value depends on return, holding period, and reinvestment conditions.

In a worst-of structure, the payoff is linked to the minimum performance across the basket. This means the investor is exposed to the weakest component at each relevant observation point, not to the average performance of the basket.

For example, in a five-stock basket, four stocks may rise while one falls sharply. Depending on the terms, that one weak stock can determine whether coupons are paid, whether the note autocalled, and whether principal protection is breached.

This is why worst-of structures must be analysed differently from standard basket exposure. In a traditional diversified portfolio, strong positions can help offset weak ones. In a worst-of note, that diversification benefit is limited because the payoff is driven by the worst performer.

Correlation matters, but not in a simple way. Low correlation can increase dispersion, making it more likely that one component becomes the outlier. High correlation can increase co-movement, especially in market stress. In worst-of structures, the key question is the left tail of the minimum: how likely one component is to become the worst-case driver in the scenarios that matter.

A buffer absorbs losses gradually up to a predefined level. If the underlying falls by 20% and the buffer is 20%, the investor typically loses nothing. If the underlying falls by 25%, the investor typically loses 5%. The defining feature is progressive loss absorption.

A barrier works differently. It provides protection only if specific conditions are met. In a Knock-In Barrier structure, protection may disappear if the barrier is breached under the relevant observation method. In a Low Strike structure, downside is typically measured at maturity relative to a predefined strike level. That is why the barrier level alone is not enough; the barrier type and observation method determine the real downside mechanics.

A buffered ETF is generally closer in payoff logic to a buffer than to a barrier note. It usually offers defined downside absorption up to a stated level, together with a cap on upside. But it is still a different vehicle. Buffered ETFs operate over defined outcome periods, and both the cap and buffer are reset for each new period based on market conditions at that time.

Structured notes usually do not charge fees in the same way as traditional advisory products or funds. Instead, much of the cost is embedded in the issue price. That means the investor may not see a separate line item for fees, even though the note includes real economic costs at entry.

Sources: SEC Office of Investor Education — Investor Bulletin: Structured Notes.

Those costs can reflect several components, including structuring costs, hedging economics, distribution margins, and issuer profit. In many cases, the clearest disclosed measure of this entry cost is the embedded margin, the gap between the issue price and the note's estimated fair value at issuance. In simple terms, that gap shows how much the investor is paying above the note's theoretical day-one value.

The six variables that determine a structured note's actual risk profile are distinct from its headline terms. Understanding them in sequence is what separates structural analysis from yield-chasing.

• 1. Issuer credit quality: Can the contractual promise actually be kept? This is evaluated first. The relevant inputs include credit ratings, CDS spreads dynamics, and capital-strength metrics such as CET1 and Leverage Ratios.
• 2. Reference asset volatility: How likely is the relevant downside threshold to be tested? Higher implied volatility can improve headline terms, especially in yield enhancement notes, where the investor is effectively being paid more for selling downside protection. But that higher premium exists precisely because the underlying is riskier and the probability of adverse outcomes is higher.
• 3. Downside Barrier: How is downside actually defined? A Knock-In Barrier, Low Strike, or Buffer may look similar at a glance, but their loss mechanics are fundamentally different.
• 4. Observation method: The same barrier or trigger level can imply very different risk depending on how it is observed; for example, daily closing-price monitoring versus maturity-only observation.
• 5. Payoff dependency: What determines the outcome? Single-name, basket average, and worst-of structures do not carry the same risk. The more the payoff depends on the weakest component, the more fragile the structure can become.
• 6. Embedded cost at issuance: What is the investor paying at entry? The embedded margin is the difference between the issue price and the note's estimated fair value at issuance, where that disclosure is available. It is a real day-one cost and should be part of the analysis before looking at headline terms.

The Oasis Buy-Side Test has two parts.

Part 1 — Define the objective and the worst acceptable outcome

• What outcome is the investor trying to achieve?: Yield enhancement, more controlled equity participation, lower emotional decision pressure, or a bespoke payoff that a simpler instrument cannot deliver.
• What is the level of risk the investor can tolerate?: The maximum downside the investor is genuinely willing and able to live with. If that is not clear, the structure is not yet ready to be evaluated.

Part 2 — Identify the trade-offs and hidden risks

• What is the investor giving up to get this payoff?: Typically some combination of upside, dividends, liquidity, or flexibility. Every structured note is a trade-off. Good design makes that trade-off explicit.
• Where are the hidden risks? The main hidden risks are issuer credit risk, limited liquidity, path dependency, embedded costs, and structural complexity that may only become visible in adverse scenarios.
• Illustrative case — Suppose an investor says the objective is to earn 8% annual income with "limited risk." That is not yet a usable objective. The Buy-Side Test forces two clarifications: how much downside is actually acceptable, and what is being given up to earn that 8%. For example, can the investor accept losing 20% of capital if the underlying equity index falls 40%? Can the investor accept that the position may be difficult to exit efficiently before maturity? If the note can lose capital below a barrier, has limited liquidity, and embeds issuer credit exposure, the real question is whether that payoff improves the investor's expected outcome relative to a simpler alternative after those trade-offs are made explicit.

A minimum evaluable term sheet should include:

Issuer identity and relevant credit information

The investor must know exactly which legal entity is the obligor, not just the banking group or brand name.

ISIN and legal classification of the instrument

The product must be identifiable as a specific security with a defined legal form.

Underlying asset or basket, fully specified

This includes the exact reference asset(s), weighting, and any worst-of logic where applicable.

Barrier type, barrier level, and observation method

It must be clear whether the barrier is observed continuously, daily, at discrete dates, or only at maturity, because observation method materially affects downside risk.

Coupon structure in full

This should include the coupon trigger, payment frequency, memory feature if any, and any conditions for missed or deferred coupons.

Maturity date and autocall schedule

The investor must be able to identify when the note matures and under what conditions it may redeem early.

Estimated value at issuance and embedded cost disclosure

Without this, the investor cannot properly assess pricing, structuring cost, or economic value at trade inception.

Secondary-market liquidity terms

The term sheet should explain whether the issuer is expected to provide market-making and under what limitations or conditions.

Governing law and insolvency ranking

The investor must understand the legal framework of the instrument and where the claim ranks in an insolvency or resolution scenario.

Bail-in exposure, where relevant

In some banking jurisdictions, certain liabilities can be written down or converted into equity by the regulator as part of a resolution process before a formal insolvency proceeding. That can materially affect investor recovery and should be disclosed where relevant.

To compare quotes properly, the investor should hold the structure constant and compare the economics.

Request quotes simultaneously from multiple issuers
At least two is a reasonable minimum for a meaningful comparison.

Specify identical terms
The quotes must refer to the same underlying, maturity, strike or initial fixing logic, barrier level, barrier observation method, coupon trigger, autocall schedule, participation or coupon terms, and denomination. If the terms differ, the quotes are not directly comparable.

Compare estimated value at issuance and derive the embedded margin
Use the issuer's estimated value at issuance as the starting point, then compare it with the issue price. The gap between the two is a practical proxy for embedded cost. A wider gap generally means more economics are retained by the manufacturing and distribution chain rather than delivered to the investor.

Assess secondary-market terms as well as launch pricing
A tighter initial quote may not be superior if the product is paired with weak liquidity support or poor secondary-market behaviour.

Translate basis points into money
Even small pricing differences matter. A 1% difference in embedded margin equals ₪10,000 per ₪1,000,000 invested. That cost may be invisible on the statement, but it is still paid by the investor.

• What it is: A structured note is a bank-issued debt security with a predefined payoff formula linked to market outcomes. In practical terms, the investor is lending money to a bank under conditions that determine how capital is repaid and how return is generated.
• What can go wrong: The two main risks are market risk and issuer credit risk. The payoff may fail because market conditions move against the structure, or because the issuing bank becomes insolvent.
• Why it belongs in your portfolio: The note must serve a specific portfolio objective. That objective may be income generation, conditional protection, or more efficient exposure than an ETF, bond, or deposit alternative. The explanation should state not only why the note fits, but also why the alternative considered was less appropriate.

There is no universal allocation to structured notes because structured notes are not one homogeneous portfolio bucket. Their appropriate weight depends on what function each structure is meant to perform within the portfolio.

A note designed for income generation, one designed for defensive equity exposure, and one designed for conditional protection should not be sized the same way simply because all three are called structured notes. The allocation decision should therefore begin with the investment objective, then test whether the structure is justified relative to the simplest available alternative of comparable horizon and credit quality.

Function alone, however, is not enough. Sizing should also reflect issuer exposure, liquidity constraints, downside mechanics, and the structure's interaction with the rest of the portfolio. At Oasis, we do not allocate to structured notes by label. We allocate to specific portfolio functions and size each structure accordingly.

When Structured Notes Improve a Portfolio — and When They Do Not