Synthetic: Difference between revisions

Latest revision as of 22:59, 17 July 2021

A synthetic financial instrument is a combination of two or more instruments, designed to replicate the cashflows from another instrument.

Example 1

A synthetic two-year deposit can be built from a simultaneous combination of:

A one-year deposit to start today and
A forward contract to re-deposit the maturing proceeds after one year, at a pre-agreed rate for the second year.

Example 2

A synthetic forward foreign exchange contract can be built from a simultaneous combination of:

@@ Line 1: / Line 1: @@
 A synthetic financial instrument is a combination of two or more instruments, designed to replicate the cashflows from another instrument.
-For example, a synthetic forward foreign exchange contract can be built from a simultaneous combination of:
-i. A spot foreign exchange contract.
+<span style="color:#4B0082">'''Example 1'''</span>
-ii. A borrowing in one of the currencies; and
-iii. A deposit of equal maturity in the other currency.
+A synthetic two-year deposit can be built from a simultaneous combination of:
+# A one-year deposit to start today and
+# A forward contract to re-deposit the maturing proceeds after one year, at a pre-agreed rate for the second year.
+<span style="color:#4B0082">'''Example 2'''</span>
+A synthetic forward foreign exchange contract can be built from a simultaneous combination of:
+# A spot foreign exchange contract
+# A borrowing in one of the currencies and
+# A deposit of equal maturity in the other currency.
 == See also ==
 * [[Arbitrage]]
 * [[Foreign exchange forward contract]]
+* [[Outright]]
+* [[Parity]]
+* [[Synthetic forward]]
+* [[Synthetic LIBOR]]
+[[Category:The_business_context]]
+[[Category:Financial_products_and_markets]]