Synthetic

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:

1. A one-year deposit to start today and
2. 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:

1. A spot foreign exchange contract
2. A borrowing in one of the currencies and
3. A deposit of equal maturity in the other currency.

See also

• Arbitrage
• Foreign exchange forward contract
• Outright
• Parity
• Synthetic forward
• Synthetic LIBOR