Structuring - How quantitative is structuring?

I did a search on role of a structurer and the desired skillset. However all that I came across was a need for "excellent quant skills" and stuff in similar vein.

To clarify, how much of quant knowledge are we considering? Is it maybe linear algebra, basic probability theory excel manipulations or stochastic calculus and fancy high endfinancial engineering stuff?
How much of the job entails coding?
This may depend on the desk, but an insightful comment will surely help!

 
Best Response

this is an email i wrote to my sister when she asked me about it a month ago (i rotated on a structuring desk this past summer):

two kinds of structuring: equity/FX/rate/commodities structuring VS. credit structuring. former is just as quantitative as derivatives flow trading, the latter is really quantitative.

1st type: i define structuring as: using derivatives as building blocks to build a custom tailored investment note to help clients express their view on anything. this requires good knowledge of derivatives. for example, client is very uncertain of ECB and fed's decision on rates, but he's certain that euro - dollar exchange rate will fluctuate a lot due to uncertain of what ECb and fed want to do. and he is also certain that no matter what ECB and fed want to do the currency rate will not exceed a range. lets say the rate is currently 1.5, and he believes it wont go higher than 1.7 and wont go lower than 1.3. So you create some structured notes that pays 0% coupon (but protects principal) if the currency rate is 1.5 a year later, but as the rate goes high or lower than 1.5 the pay off (coupon)begin to increase (on both sides), but if the rate goes out of the range then coupon is zero again. so it's like a bond that has coupons that depend on scenarios. lets say mutual fund wanna invest in commodities, but they cant buy futures coz they can only invest in fixed income and equities since it's low risk pension fund. so they tell structurers that they wanna invest in commodities, so we create a note, that protects principal, and pays you a coupon of 3*i%, i is the growth in that commodities in a year minus 5%. so basically for everything percent this commodity grows in the next year that surpasses 5%, you can 3 times that number as your coupon. even if commodities fall, you still get your principal back. so you create a zero coupon bond embeding an option. the zero conpon bond matures to the principal on expiration date to protect principal, the rest of the money goes to buy the option that has crazy payoff if something is triggered. so now the mutual fund has an fixed income securitiy that has exposure to commodities return and risk. you can do hybrids, interest rate AND commodity, you can do thousands of combinations, like a basket of 5 currencies, and only the best performing 3 will be counted in payoff calculation. or a fucking russian roulette, after every month, the worst performing currency in the group gets weeded out and the others remain. structuruing is all about originality and creativity, you think about trade ideas that clients may be interested in, you sell the idea to clients, if they wanna buy you structure this thing with the help of traders, and you sell it and charge a transaction fee, that's how you make $. lets say you are willing to give up some extra upside of APPLE stock performance to eliminate downside. sure i;ll make u something so you can receive apple's upside until it reaches 15% upside (then it goes flat on 15% even if apples rises 30%), but if apple goes down 20% your loss will be stopped out at 5%. its all about selling ideas, requires good quant skills to work and price these structured notes. For these interviews you just need to study option math, bulk up on what the greeks mean, delta gamma, vega, theta, rho, etc. know payoffs well. ITM, OTM, ATM concepts and etc. undergrads can easily do it.

2. credit structuring. this shit is hard. it's basically CDO. so the beautiful part about CDO is that: since companies default at different times, you can construct some weird probability distribution (that's why they hire phd) and find a way to structure a CDO with 100 single name companies with B rating and yet buy protection on this CDO at a low cost as if these companies are AAA rated. it's all about the correlation between these 100 names. if correl goes out of wack you are fucked and everything blows up. structured debt crisis happened because people didnt think correlation will go out of wack that much. it's unseen historically. thus these super senior traches aint worth shit, they would be safe if correlation holds. but it no longer holds after shit got fucked up. in correlation trading you basically quote spread to buy separate tranches. let's say you go to a correlation trader and say i wanna buy a CDO (virtual/synthetic) on 100 single names (you name whatever company you want), and you specifically want to buy the 15-25% tranch. the trader puts a bunch of shit in the model and model spits out some number. he tells you, this tranch cost this (xxx) much. This xxx number is hugely affected by correlation between the default probability of the 100 comapnies. quant stuff. it's all about managing risk and think of fucked up scenarios of what can happen and hedge your risk. but i really dont know that much about CDO/CMO structuring, no experience besides talking to people.

VBA knowledge will be very helpful in structuring IMO. all we summer interns did on the structuring desk this past summer is VBA coding.

 

also it's worth bearing in mind there are ppl who call themselves "structurers" but are much more like marketers of structured products. I know 'structurers' who have no idea of how to price trades, they just come up with ideas they think will sell and outsource the pricing. it's like that at a few shops

 

I wouldn't say credit structuring is any more quantitative on average than rates or commodities structuring.

There are also different types of structuring. For instance, on commodities desks there are usually 2 structuring desks. First, you have the corporate structuring desk. They do bespoke hedges for corporate clients. This area of the desk tends to have a lot of crossover with not just trading, but also IBD, Lev Fin, and PE (both PE firms as clients or internal PE groups). An example would be a firm wants to build a new $1.0B power plant. The commodities corporate structuring desk will lead the deal, work with IBD/Lev Fin to secure financing, and then structure a long-term (10-20yr) commodities hedge. These types of desks often deal with power, and I think power is inherently more quantitative (at least at the moment) than most other products out there, including credit.

The 2nd type is the one your sister describes above: investor structuring (different banks have different names for it, but this is close enough). An example there would be a CCO (collateralized commodity obligation)--similar to a synthetic CDO but with CTS (commodity trigger swaps) as the underlying. This area would also cover exotic basket options, commodity-linked notes, etc. Basically anything that could be structured and then sold to multiple investors (i.e. not bespoke). This desks focuses on investors vs. corporate hedgers.

 

i know that the structurers i work with don't necessarily have the most quanty backgrounds but they certainly price trades and they do have a very technical background. they often have a very deep cross product understanding and really understand finance from a credit, vol, commod perspective but also understand cva, legal, and regulatory things better than sales people or traders. they sound like a hybrid of the two roles described above. the analyst there is a fin. major from a target school. the only difference is there isnt as deep a market for credit correlation trades, so a lot of them are more 1st order risk trades.

 

Great thread guys. Can I ask, how client facing are structures? Surely if they are creating these products they must have a good understanding of the clients needs - doesn't this mean their roles would overlap with those of a salesperson? Is it the salespeople who market the products exclusively? In this case, I know GS has a "structured products desk" on the Equity Trading Floor - how does this desk differ to their Equity Derivs Desk (comprised of a separate Sales, Trading and Structuring desks).

Thanks a bunch

 

This is a very good question that I wish I asked before joining as a structurer, and also explains why i quit. It is very different bank by bank. At some banks structurers are facing clients relatively often. As you said, Structurers have the best understanding of the product, as good as traders on the pricing/risk side, maybe a bit less on hedging, and more on how to wrap it/structure/sell it. On the sales side, some of them are very strong and have a real value added, but a large number of sales don't know much past the payoff and are just gatekeepers. So what happens is that it is very dependant on the internal structure and political balance of power at the MD/senior MD level. If the shop is run by pure sales, it can be quite frustrating for structurers. Salespeople don't like bringing structurers with them to client meetings because they look useless to the process... So unless client is fed up with the BS and wants to talk technical you are not meeting them. To be honest on the most complex structures, salespeople are often a liability and just another layer that copy pastes conversation between clients and structuring, but still wants to look as if they were in charge.

 

I have heard that structuring role generally earns the highest in IB. Similar info can be found from here : investment-banking-salaries-and-bonuses-for-23-year-olds-and-40-year-olds-by-job (under efinancialcareers website)

So my question is: Is structuring role, of all other IB departments, paid the highest ? Anyone knows how much the top tier banks pay their structuring team?

 

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