Synthetic: Difference between revisions
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imported>Doug Williamson (Add second example.) |
imported>Doug Williamson (Link with Forward yield page.) |
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* [[Arbitrage]] | * [[Arbitrage]] | ||
* [[Foreign exchange forward contract]] | * [[Foreign exchange forward contract]] | ||
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Revision as of 12:31, 13 November 2015
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:
- A spot foreign exchange contract
- A borrowing in one of the currencies and
- A deposit of equal maturity in the other currency.
