Class presentation on hybrid securities.

1. Hybrid Securities
Unit - 3

2. Hybrid securities
Definition:
• Securities that combine more than one elemental market in their
structure
• The LEGO or Building block approach of constructing the building the
hybrid securities
• Examples:
• 5 years fixed rate bond with interest payable in US dollars and principal
payable in Japanese yen

3. Elemental securities
• The securities whose returns are based on single variable of return.
• Returns may be interest – based, commodity-based, equity-based,
forex-based
• Has a trading market where an efficient bid and offer price is available
from many market makers.
• As the complexity increases, a hybrid security becomes an elemental
security.
• Example:
• 5-year fixed bond with interest payable in US dollars

4. Construction of new hybrid securities
Investor
objectives
Elemental
markets
Derivatives
products
team
Structured
hybrid
Investor
Issuer
What are the building
blocks in the
underlying markets?
What do they want
to buy?
Does final product
meet initial request?
Can we find an
issuer?
• Develop structure
• Risk/ return analysis
• Price product
• Regulatory tax treatment
• Execution program
• Immunization for issuer
• Sourcing of elemental
markets
INPUTS THE CREATION
PROCESS
THE NEW PRODUCT THE BALANCING ACT

5. Types of hybrid securities
• 4 major types:
• Interest rate markets
• Forex rate markets
• Commodity markets
• Equities markets
• Interest rate markets:
• Dollar-dominated markets
• Yen-dominated markets
• Deutsche mark-dominated markets
• Commodity markets
• Gold
• Silver
• Wheat
• Cattle, etc…

6. Types of structured hybrid securities
Security Linkage: Access Opportunities in other markets
Currency –
Linked
Bonds
Commodity-
Linked
bonds
Equity-
Linked
bonds
Yield Curve
- Linked
bonds
Interest Rate
- Linked
bonds
Interest Rate
- Linked
bonds
Security Structure: Types of Linked Payments
Principal
Repayment
- Linked
Coupon
payment -
Linked
Both Principal and Coupon payment
- Linked
Derivative form: Method of embedded Linkage
Options-
oriented
Futures -
oriented
Forwards -
oriented
Swaps-
oriented
Distribution: Method of Sale
Public
Issues
Private
Issues
Offshore
Issues

7. • Interest- rate / Foreign Exchange hybrid
• Interest rate / Equity hybrid
• Currency/ commodity hybrid
Types of structured hybrid securities

8. Investor motivation
• Pricing Efficiency
• Regulatory / Policy
constraints
• Market Access
• Market enterprise
• Desire to deal with a single
party
Issuer motivation
• Arbitrage transactions
• Non arbitrage transactions