Aug 152020
 

A synthetic is a combination of financial instruments – often two, sometimes more – designed to mimic another single security. For example, you can combine an investment in redeemable preference shares – which carry a fixed dividend similar to a bond – with warrants giving you the right to buy a company’s ordinary shares. That creates a ‘synthetic’ with a similar return to that on convertible bonds from the same firm. Why bother? Maybe because the investment you want isn’t available, so you create a synthetic instead. Tax also matters – different securities are treated differently. Finally, you may be able to get higher returns from the synthetic than the mimicked security without significant extra costs.

Another great day at work and I am feeling satisfied – even a little elated! Tomorrow I’ll write some more on financial terms. Please come back every day and learn something new.

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