Difference between revisions of "Synthetic"

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(Add second example.)
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* [[Arbitrage]]
 
* [[Arbitrage]]
 
* [[Foreign exchange forward contract]]
 
* [[Foreign exchange forward contract]]
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* [[Forward yield]]

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:

  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