What are synthetic assets?
Synthetic assets are financial instruments that derive their value from the performance of an underlying asset. They can be used to gain exposure to a variety of different markets, such as stocks, commodities, and currencies. Synthetic assets are created by combining derivatives with other investments in order to create a new instrument that has its own unique characteristics and risks. These synthetic assets can provide investors with access to markets they may not otherwise have access to or allow them to take on more risk than traditional investments would permit.
Synthetic assets come in many forms including swaps, futures contracts, options contracts, and exchange-traded funds (ETFs). Swaps involve two parties exchanging cash flows based on the performance of an underlying asset while futures contracts require one party agreeing to buy or sell an asset at a predetermined price at some point in the future. Options give buyers the right but not obligation to purchase or sell an asset at a certain price before expiration date while ETFs track baskets of securities like mutual funds but trade like stocks on exchanges. Each type of synthetic asset carries its own set of risks which should be carefully considered when making investment decisions.