What Is Synthetic Forward Contract?

A synthetic forward contract uses call and put options with the same strike price and time to expiry to create an offsetting forward position. An investor can buy/sell a 澳洲幸运5开奖号码历史查询:call option and sell/buy a 澳洲幸运5开奖号码历史查询:put option with the same strike price and 澳洲幸运5开奖号码历史查询:expiration date with the intent being to mimic a regular 澳洲幸运5开奖号码历史查询:forward contract. Synthetic forward contracts are also called 澳洲幸运5开奖号码历史查询:synthetic futures contracts.

Understanding Synthetic Forward Contracts

Synthetic forward contracts can help investors reduce their risk although, as with trading futures outright, investors still face the possibility of significant losses if proper 澳洲幸运5开奖号码历史查询:risk management strategies are n♎ot implemented. For instance, a market maker ca🌄n offset the risk of holding a long or short forward position by creating a corresponding short or long synthetic forward position.

A major advantage of synthetic forwards is that a regular forward position can be maintained without the same types of requirements for 澳洲幸运5开奖号码历史查询:counterparties, including the risk that one of the parties will renege on the agreement. However, unlike a forward contract, a synthetic forward contract requires that the investor pay a 澳洲幸运5开奖号码历史查询:net option premium when executing the contract.

For example, to create a synthetic long forward contract on a stock (ABC stock at $60 for June 30, 2019):

• An investor buys a call with a $60 strike price with expiry on June 30, 2019.
• An investor sells (writes) a put with a $60 strike price with expiry on June 30, 2019.
• If the stock price is above the strike price on the expiration date, the investor, who owns the call, will want to exercise that option and pay the strike price to buy the stock.
• If the stock price at expiration is below the strike price, the buyer of the put will want to exercise that option. The result is the investor will also buy the stock by paying the strike price.

In either case, the investorꦑ ends up buying the stock at the strike price, which was loꦍcked in when the synthetic forward contract was established.

Keep in mind that there could be a cost for this guarantee. It all depends on the strike price and expiration date chosen. Put and call options with the same strike and expiration may be priced differently, depending on how far 澳洲幸运5开奖号码历史查询:in the money or 澳洲幸运5开奖号码历史查询:out of the money the strike prices may be. Typically, the parameters chosen end up with the call pr🍬emium being slightly higher than the put premium, creating a net debit in the account at the start.