© Natixis 2006 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)