When creating a synthetic security, in order to successfully create the security

Question

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

Explanation / Answer

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.

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