Synthetic Products

What Does Synthetic Products Mean?

Synthetic products are financial instruments designed to replicate the trading behavior of real goods or assets. These securities derive their value from the financial performance of underlying commodities.

Insuranceopedia Explains Synthetic Products

Synthetic products are not tangible goods that an ordinary person can consume, such as food or drinks. Instead, they exist in the form of contracts. However, similar to food or drinks, they can be bought, sold, and traded.

These contracts, such as bonds and stocks, are known as derivatives. The term implies that these securities often depend on the market performance of real commodities, like agricultural produce. However, the holder of a synthetic product does not, for instance, engage in farming. What they own is a contract that can be bought or sold, with its price influenced by the market value of an agricultural product.

The same idea shows up in some insurance products, where the policy’s value is tied to the performance of a market index without the policyholder owning any of the underlying stocks. This is how indexed universal life insurance works, and annuities can use a similar approach to pay out based on the performance of a chosen benchmark rather than on investments held directly by the buyer.