Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

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.