Barriers: the line that defines your risk

A barrier is a level of the underlying below which the protective feature of a structure switches off. Above the barrier, you may receive a coupon or have your principal protected. Below it, you can be exposed to the full market loss.

That switch is binary in effect. The difference between a barrier held and a barrier breached is often the difference between a positive coupon and a real capital loss.

Some barriers are only checked at maturity. Others are monitored continuously through the life of the note. A continuously monitored barrier is easier to breach, because a single intraday move can trigger it even if the market recovers.

Two notes with the same headline barrier can carry very different risk depending on how that barrier is observed. The term sheet will say which applies.

Look at the distance between today's level and the barrier in the context of the underlying's own volatility. A 25 percent barrier means something different on a calm large-cap index than on a volatile sector index.

Stress the structure against real historical drawdowns before deciding the barrier is comfortable. The market has tested most barriers at some point.