What is Atypical Financial Contracts? Definition of Atypical Financial Contracts, Atypical Financial Contracts Meaning and Concept
The contracts financial atypical or deposits are structured investment products by which credit institutions receive money, securities or both. In return, they offer a retribution in the future.
At the end of the contract term, the credit institution will pay in cash (and / or its equivalents) or with financial instruments. This, depending on the evolution of a share, a portfolio or a stock index. Therefore, the full refund of the client's capital is not ensured.
Advantages and disadvantages of atypical financial contracts
The advantages of atypical financial contracts include:
- They offer a higher return than bank savings accounts.
- They can be useful for people familiar with capital markets and who understand complex financial products.
However, there are also some downsides to these contracts:
- They are a high risk alternative. Suppose that the profitability of the structured deposit depends on the price of Minera XY. So if the shares of this company fall during the period of the agreement, the investor will lose part of his capital.
- They are difficult for most of the public to understand. They can be confused with savings products, when in reality they are an investment alternative.
- Since they are not traded on organized secondary markets (such as the stock exchange ), they cannot be canceled early. This, even if the expectation is of loss.
Composition of atypical financial contracts
Atypical financial contracts result from the combination of two types of products with different characteristics:
- A deposit, usually short-term, that pays a return higher than the market average.
- A financial asset with a long-term horizon. It can be a participation in an investment fund or a deposit linked to the performance of a share (or combination of shares) or a stock index.