Beware the pitfalls of averaging in structured products

Practice is useful for dampening volatility in valuations but carries risks

Averaging for structured products is a fickle business

The use of averaging in structured products – determining a product's returns by measuring the value of the underlying asset at set points over its lifetime, rather than simply at the strike date and at maturity – is common enough. But what are the advantages and disadvantages in applying the method?

Proponents argue averaging is useful for growth-focused products, where the investor is long one or more options, because it serves as a way of reducing the volatility – and therefore the cost – of

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