Unit 3 hybrid securities

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