The term hybrid instrument is not precisely defined. Generally, it is used to refer to financial instruments that blend characteristics of debt and equity markets. Convertible bonds are an example. They are debt instruments that have an imbedded option allowing the holder to exchange them for shares of the issuing corporation's stock. For this reason, their market prices tend to be influenced by both interest rates as well as the issuer's stock price. Another example would be a structured note linked to some equity index. These take many forms. Typical would be a five year note. It is a debt instrument issued by a corporation or sovereign, but instead of paying interest, it returns the greater of
Other examples of hybrids are preferred stock, trust preferred securities (TruPS) or equity default swaps (EDS). Some people extend the definition of hybrid instrument to encompass instruments that straddle other market sectors. According to this definition, a quanto option or a volatility future would be considered a hybrid. You may hear people speaking of "hybrid securities," "hybrid products" or simply "hybrids." All are synonyms for "hybrid instruments."
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