Hello
can you help to explain the concept of synthetic position.
A stock index future is an agreement to purchase or sell stocks on a future date at a specific price.
A synthetic option is a way of recreating the payoff and risk profile of a particular option using combinations of the underlying instrument along with different options.
Synthetic options are created through the concept of put-call parity implicit in options pricing models. This implies that holding a short put along with a long call of the same class will deliver the same return as holding the same underlying with a price equal to the option's strike price.
Large institutional investors can replicate a well-diversified portfolio of common stock by holding
- A long position in the stock index futures contract as well as
- Satisfying the margin requirement with T-bills
The resulting portfolio is a synthetic index portfolio.
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