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The reason the synthetic option is equivalent to futures contract is because
it has the cost of money built into it. If I buy a stock today for $100 and
interest rates are 5% a one year future on the stock would have a fair value
of $105. The 100 strike call could trade at something like $10 (a plug
number) and the put could be sold for $5 (not a plug number but rather the
required parity number). Almost no one calculates carry on stock into the
equation .. whereas in futures and options it is built in.
moog@xxxxxx wrote:
> Thanks for the response, Mike, bear with me, I follow your comments
> about put/call parity and the distinction between options equivalency
> and hedging, but am still unclear about something. In "Derivatives"
> by Don Chance I found this: "a combination of a long call and a short
> put is equivalent to a (long) futures contract. In fact, a long-
> call/short put combination is called a synthetic futures contract. A
> risk-free portfolio would consist of a long futures contract and a
> short synthetic futures contract." Why does this author liken the
> long-call/short put to a futures contract, rather than to stock as
> you have it? Chance seems to be saying that the equivalent to a long-
> call/short put position (in, say, options on S&P futures) would be an
> S&P futures contract, not the S&P cash...which goes back to my
> original notion that only derivatives can be truly equivalent to
> derivatives...
>
> Any comments you might care to make would be appreciated...I'm very
> pleased to see topics like this addressed on this site.
>
> JeffR
>
> --- In realtraders@xxxxxxxxxxx, MikeSuesserott@xxxx wrote:
> > Suppose with JDSU at 60, we bought 10 JDSU Mar 60 calls and
> simultaneously
> > sold 10 JDSU Mar 60 puts. This is called a "synthetic long".
> Slippage and
> > brief imbalances aside, this position will behave *exactly* as if
> we had
> > bought 1000 shares of JDSU.
>
>
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