Management may opt purely and simply for the best possible return, declining any risk, or they might decide on using some of their surplus cash to limit the corporate risk or to improve the company's risk profile. Structured products may be suitable as financial instruments to help achieve this aim.

Industrial companies too may use structured products

A structured product is a combination of different financial instruments. A typical form is the capital guarantee structure, where the invested capital is guaranteed and the coupon - through a derivative - is linked to an underlying financial instrument.

The fact that there is a very diverse range of underlying financial instruments is shown by the variety of derivatives categories available. These include derivatives based on interest rates, foreign-exchange products, equity-linked derivatives, credit derivatives, derivatives relating to commodities and those linked to inflation.

Structured products and derivatives are financial instruments widely used by financial institutions and institutional investors. However, they may also be used by industrial companies. The minimum amount is inversely proportional to the duration. What is more, the intention is not that companies should take a market position, but that they should improve their risk profile by means of these financial instruments.

A link with the business activity is important

It is important that structured products should invariably be linked to the company's underlying business activities. If this is not so, then the risk increases considerably.

For instance, it might be a good idea for a company whose profit is sensitive to oil prices to invest in a structured product linked to the oil price. The company can then obtain an extra dividend if the oil price rises. If the oil price falls, the company does not receive a coupon payment, but it does have the guarantee that the capital initially invested is safeguarded.

A food company or insurance company may opt for a structured product linked to a weather derivative, a niche market that is growing rapidly. In this way, it can - for instance - hedge against the negative effects of high rainfall.

Investing in structured products and derivatives is not a game of chance

Companies are well advised to integrate investment in structured products and derivatives in their general risk management and to have them linked to their risk profile. For instance, one possible guideline is to invest in products with a capital guarantee. Companies with stringent risk management will make rather limited investment in structured products, while others may set their treasury manager less strict guidelines.