Synthetic Futures Contract
What It Is:
A synthetic futures contract comprises call options accompanied by put options in order to imitate the attributes of a futures contract.
How It Works/Example:
A synthetic long futures contract can be simulated using a short put option in conjunction with a long call option. Conversely, a synthetic short futures contract can be replicated by placing a long put option accompanied by a short call. In order to be effective, the strike price and expiration date must be identical. For instance, a synthetic long futures contract on stock XYZ would comprise a put option and a call option as described, both of which would have the same expiration date of (e.g. 31 December 2009) and strike price (e.g. $75).
Why It Matters:
A synthetic futures contract allows an investor to benefit from the attributes and manner of payment of a futures contract without taking on the risks and obligations which a futures contract comprises.
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Cached on May 23, 2012, 6:40 pm