Difference between revisions of "Synthetic"

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

Latest revision as of 15:43, 27 July 2020

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