Free Structured Products for Retail Investors: Bank of China and the Negative Oil Price Case Study Solution | Assignment Help

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Written by Gary F. Smith
Publish Date: 2024-12-03

Harvard Case - Structured Products for Retail Investors: Bank of China and the Negative Oil Price

"Structured Products for Retail Investors: Bank of China and the Negative Oil Price" Harvard business case study is written by Huiyan Qiu, Tsun-kan Wan. It deals with the challenges in the field of Finance. The case study is 7 page(s) long and it was first published on : Dec 3, 2020

At Fern Fort University, we recommend that Bank of China (BOC) carefully consider its approach to structured products for retail investors, particularly in light of the unprecedented negative oil price event. This recommendation emphasizes a shift towards a more transparent, risk-aware, and education-focused strategy for structured product offerings.

2. Background

The case study focuses on Bank of China's (BOC) position in the Chinese retail investment market, specifically its structured products offerings. In early 2020, the COVID-19 pandemic and subsequent global economic downturn led to a dramatic drop in oil prices, culminating in the unprecedented event of negative oil prices. This event highlighted the inherent risk associated with structured products, particularly those linked to volatile underlying assets like oil.

The case study presents BOC with the challenge of balancing its desire to attract retail investors with the need to manage risk and maintain investor confidence. It also highlights the importance of understanding the evolving regulatory landscape and the need to adapt to changing investor preferences.

3. Analysis of the Case Study

The case study can be analyzed through the lens of several frameworks:

Financial Analysis:

  • Risk Management: The negative oil price event exposed the inherent risk associated with structured products, especially those linked to volatile assets. BOC needs to strengthen its risk management practices, including rigorous product design, comprehensive due diligence, and robust risk assessment methodologies.
  • Financial Statement Analysis: BOC should analyze its financial statements to assess the impact of structured product sales on its overall profitability and capital structure. This analysis should include a detailed assessment of potential losses from structured products in volatile market conditions.
  • Return on Investment (ROI): BOC needs to carefully evaluate the ROI of its structured product offerings, considering both the potential for high returns and the associated risks.

Marketing and Sales:

  • Customer Segmentation: BOC should segment its retail investor base to understand the risk appetite and financial literacy of different customer groups. This will allow for targeted marketing and product development strategies.
  • Transparency and Education: BOC needs to prioritize transparency and education for retail investors. This includes providing clear and concise product information, explaining the risks involved, and offering educational resources to enhance investor understanding.
  • Pricing Strategy: BOC should revisit its pricing strategy for structured products, considering the increased risk perception and potential for losses in volatile markets.

Operations Strategy:

  • Technology and Analytics: BOC should invest in technology and analytics to improve its product development, risk management, and customer service capabilities. This includes leveraging data analytics to identify potential risks and optimize product offerings.
  • Process Optimization: BOC should streamline its internal processes for product development, risk assessment, and customer onboarding to improve efficiency and reduce operational risks.

4. Recommendations

Based on the analysis, BOC should implement the following recommendations:

  1. Shift to a Risk-Aware Product Strategy: BOC should prioritize structured products with lower risk profiles and focus on educating investors about the potential risks involved. This could include offering products linked to more stable assets or incorporating risk mitigation strategies.
  2. Enhance Transparency and Education: BOC should develop a comprehensive investor education program, providing clear and concise information about structured products and their associated risks. This program should be accessible through various channels, including online platforms, brochures, and seminars.
  3. Strengthen Risk Management Practices: BOC should implement robust risk management practices, including rigorous product design, comprehensive due diligence, and independent risk assessment. This should involve hiring experienced professionals with expertise in structured products and risk management.
  4. Invest in Technology and Analytics: BOC should invest in technology and analytics to enhance its risk management capabilities, improve product development, and provide better customer service. This includes leveraging data analytics to identify potential risks and optimize product offerings.
  5. Promote Financial Literacy: BOC should actively promote financial literacy among its retail investor base through educational initiatives and partnerships with financial institutions. This will help investors make informed decisions and manage their investments effectively.

5. Basis of Recommendations

These recommendations are based on the following considerations:

  • Core Competencies and Consistency with Mission: BOC's core competency lies in providing financial services to its customers. By offering structured products with a focus on risk management and investor education, BOC can align its product offerings with its mission of providing responsible financial solutions.
  • External Customers and Internal Clients: These recommendations prioritize the needs of retail investors by providing them with clear information, transparent products, and effective risk management. They also cater to the needs of internal clients by enhancing the bank's risk management practices and improving its operational efficiency.
  • Competitors: By focusing on risk management and investor education, BOC can differentiate itself from competitors and attract investors seeking responsible and transparent financial solutions.
  • Attractiveness: The recommendations aim to enhance the attractiveness of BOC's structured product offerings by reducing risk, improving transparency, and providing better investor education. This will lead to increased investor confidence and potentially higher returns for BOC.

6. Conclusion

The negative oil price event highlighted the need for a more cautious and transparent approach to structured products for retail investors. By implementing the recommendations outlined above, BOC can strengthen its risk management practices, enhance investor education, and build a more sustainable and profitable business model for its structured product offerings.

7. Discussion

Alternative approaches to managing the risks associated with structured products include:

  • Complete withdrawal from the structured product market: This would eliminate the risks associated with these products but also limit BOC's potential for growth in the retail investment market.
  • Restricting structured product offerings to high-net-worth individuals: This approach would limit the bank's target market but could mitigate some risks by focusing on investors with higher risk tolerance and financial literacy.

The key assumptions underlying these recommendations include:

  • Continued regulatory scrutiny of structured products: This assumption suggests that BOC needs to remain vigilant in its compliance with regulations and ensure the transparency and fairness of its product offerings.
  • Investor demand for risk-managed products: This assumption suggests that investors are increasingly seeking products that offer a balance between potential returns and risk mitigation.

8. Next Steps

BOC should implement the recommendations outlined above through a phased approach:

  • Phase 1 (Short-Term): Implement a comprehensive investor education program, enhance risk management practices, and review the pricing strategy for structured products.
  • Phase 2 (Medium-Term): Invest in technology and analytics to improve product development, risk assessment, and customer service.
  • Phase 3 (Long-Term): Develop a long-term strategy for structured product offerings that aligns with BOC's overall business objectives and the evolving needs of retail investors.

By taking these steps, BOC can navigate the challenges presented by the negative oil price event and position itself for long-term success in the retail investment market.

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Case Description

This case explores how the retail customers of the Bank of China lost an astounding RMB10bn (USD1.27bn) by investing in a structured product. The product, Crude Oil Treasure, was linked to West Texas Intermediate (WTI) futures. These crude oil futures were traded on the New York Mercantile Exchange and were used as a benchmark in oil pricing. The negative futures price of -USD37.63 per barrel on 20 April 2020 was a "black swan" event. Never before had the price of oil futures plunged into the negative. Through the case, students will grapple with the practical questions of how to identify the characteristics of a structured product by reference to the traits exhibited in a standard futures contract. Students will also be asked questions on finance theories about contango, extreme contango, backwardation, extreme backwardation, normal contango, and normal backwardation.

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