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Hybrid Products. David Besançon 27 mars 2008. What are Hybrid Products ? . A hybrid product is a financial structure whose payoff combines different assets, market sectors and/or sub-sectors “Explicit” hybrids: when multiple asset classes enter into payoff (termsheet) of product

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Hybrid products l.jpg

Hybrid Products

David Besançon

27 mars 2008


What are hybrid products l.jpg
What are Hybrid Products ?

  • A hybrid product is a financial structure whose payoff combines different assets, market sectors and/or sub-sectors

  • “Explicit” hybrids: when multiple asset classes enter into payoff (termsheet) of product

    • Call on baskets and variation

    • Multi-asset CPPI

  • “Implicit” hybrids: when pricing (valuation) depends on more than one asset class without being explicit

    • Equity capital protected notes

    • Early redemption products (TARN / Callable)


  • Why use hybrid products l.jpg
    Why use Hybrid Products ?

    • To gain simultaneous exposure to different asset classes

      • “best of many worlds”

  • To reduce cost (risks) through (de-)correlation

    • e.g. basket option on lowly correlated components

  • To increase leverage or enhance yield

    • e.g. equity option whose payoff increases under FX/IR/Credit scenarios (joint probabilities)

  • To reduce hedging cost by creating returns offsetting liabilities

    • e.g. commodity producer financing optimisation

  • etc...


  • Main asset classes l.jpg
    Main Asset Classes

    • 7 main asset classes:

      • Equities

      • Fixed Income

      • FX

      • Inflation

      • Commodities

      • Credit

      • Alternatives

  • Each class has its own characteristics and own market conventions

  • Modeling of each class is highly specific and can be (very) complex



  • Valuing hybrids the 3cs challenge l.jpg
    Valuing Hybrids: the 3Cs challenge

    • Calibrate: be able to model precisely each individual asset class

      • specific behavior, market specificity and liquidity (if any)

  • Correlate: be able to model assets interplay

    • specific modeling and techniques, correlation definition is model dependent

  • Compute: be able to provide valuation

    • numerical recipes (MC, PDE, ..)

    • many non-observable data

    • stable / robust / meaningful / speedy pricing

    • exposures to be mapped to tradable assets (for hedging)


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