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The concept of synthetic replication is central to understanding how derivative securities are priced. Required:...

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Accounting

The concept of synthetic replication is central to understanding how derivative securities are priced.

Required: (in no more than 250 words)

Explain what is meant by synthetic replication. Also, write a clear explanation of how synthetic replication is relevant to the valuation of derivatives. You must use at least two of the following derivative securities to provide examples that help to articulate your answer.

  1. Forward contracts
  2. Call or put option contracts
  3. Forward Rate Agreements (FRAs)
  4. Interest rate swaps

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