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Hybrid Products

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

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  1. Hybrid Products David Besançon 27 mars 2008

  2. 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)

  3. 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...

  4. 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

  5. Main Asset Classes (2)

  6. 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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