Difference between revisions of "Synthetic"
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| − | + | <span style="color:#4B0082">'''Example 1'''</span> | |
| − | # A spot foreign exchange contract | + | A synthetic two-year deposit can be built from a simultaneous combination of: |
| − | # A borrowing in one of the currencies | + | |
| + | # 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. | # A deposit of equal maturity in the other currency. | ||
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* [[Arbitrage]] | * [[Arbitrage]] | ||
* [[Foreign exchange forward contract]] | * [[Foreign exchange forward contract]] | ||
| + | * [[Outright]] | ||
| + | * [[Parity]] | ||
| + | * [[Synthetic forward]] | ||
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| + | [[Category:The_business_context]] | ||
| + | [[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:
- 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.
