Complex and risky products
A hybrid product is a unique financial product that usually combines the characteristics of several instruments from different asset classes. This type of product is generally more complex to understand and to value than simple products and is aimed at a well-informed public aware of the intrinsic risks.
Indeed, while most of the time hybrid securities combine debt and equity characteristics, this is not always the case and one can also have products that cover equity and credit classes, foreign exchange and interest rate classes, and any other combination.
Thus, as investor demands become more and more sophisticated, new types of hybrid securities are constantly being introduced to try to meet these needs. Prior to the 2008 crisis, some of them combined the characteristics of more than two asset classes and became so complicated that they were sometimes difficult to define and forced investors to take risks that were sometimes inconsequential.
The most common example of a hybrid security is the convertible bond, which has the characteristics of an ordinary bond but whose price is strongly influenced by the price movements of the share into which it can be converted. It is therefore a bond that gives its holder the right (but not the obligation) to be exchanged for one or more shares during a given period.
It is therefore a classic bond, enhanced by a call option on the issuer's existing or new shares, thus combining the characteristics of a fixed-income product and an equity derivative.