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In: Economics

Differentiate between a hybrid security and a derivative security. Minimum of 120 words please.

Differentiate between a hybrid security and a derivative security. Minimum of 120 words please.

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Expert Solution

HYBRID SECURITY

The two or more different financial instruments are combined using the single financial security called the Hybrid Security.The

hybrid the security is also known as 'hybrids'; which generally combines both debt and equity characteristics.The most typical type of hybrid security is a convertible bond.The convertible bond having the features of ordinary bond.But , it is heavily influenced by price movements of stack that which is convertible into.

Types Of Hybrid Securities:

  1. Preference Shares :- One of the common type of hybrid security is convertible preference shares.At fixed or floating rate this security pays dividends .The common stock dividend are payed after the initial dividends pays
  2. Convertible Bonds:-​​​​​​​ Rather than regular bonds the convertible bonds will provides greater potential for appreciation.It pays only less interest than conventional bonds.
  3. Sophisticated Investors:-In this security it is difficult to define either debt or equity.The hybrid security are being introduced all the time in a attempt to meet the needs of sophisticated investors.

DERIVATIVE SECURITY

A Derivative Security is an financial security. It's value is derived from a group of assets or underlying assets.The price of derivative security is determined by fluctuation in underlying assets includes interest rates,binds,stocks,currencies,etc.

Common derivatives includes Future Contracts, Options and Swaps .

  1. Future Contracts:-There are the agreement between to parties for the purchase and delivery of an asset at an agreed upon price at a future date.
  2. Options:-These are the other common form of derivative.It is similar to future contracts.It is agreement between to parties to buy or sell an asset with a predetermined future date for a specific date.
  3. Swap:-The another type of derivative that is often use to swap one kind of cash flow with another is the swap derivative

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