– Embodies the notion that there are a few elemental building blocks or financial contracts that can be combined in a rigorous fashion to produce an almost unlimited variety of non-standard cash flow expectations.
– Conceptually, the idea is that all familiar financial securities ca be thought of as having some combination of;
- Credit extension (such as loans, bonds, etc.)
- Price fixing (such as futures / forward contracts)
- Price Insurance (such as call / put options)
– The invention of new or hybrid financial securities to fit exactly some requirement of an individual financial market participant is a matter of combining these elements into a package of claims that will produce a profile of cash flow expectations meeting this need.