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In: Finance

When creating a synthetic security, in order to successfully create the security, a number of assumptions or theories must be accepted or adhered to:

When creating a synthetic security, in order to successfully create the security, a number of assumptions or theories must be accepted or adhered to:

a. One assumption is liquidity, that there is enough liquidity to insure stable pricing. Another is replication; the synthetic security is able to be replicated.

b. There are many assumptions or theories. Two that must occur is the theory of pricing, or market-clearing, the second is denotation, the theory associated with a security’s notional value. 

c. One assumption is efficient pricing or cost effective arbitrage, another is replication, that is, two securities efficiently priced can be combined to replicate the returns of a third security.

d. All of the above e. None of the above

Solutions

Expert Solution

c. One assumption is efficient pricing or cost effective arbitrage, another is replication, that is, two securities efficiently priced can be combined to replicate the returns of a third security.
Synthetic Securities is a combination of assets that have the same profit/loss profile as another assets or group of assets and it has efficient pricing or cost effective arbitrage.

jeff jeffy answered 2 years ago
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