Question

Is the strategy in the red box considered as synthetic forward ?

Stock XYZ has a current price of 100. The forward price for delivery of this stock in 1 year is 110. Unless otherwise indicated, the stock pays no dividends and the annual effective risk-free interest rate is 10% Investing In a stock t-0 Borrow 100 Buy a stock Payoff +100Clear Loan 100 0 Profit- S, - 100 (1.1) -100(1.1) Own a stock Payoff S1 - 100(1.1 Investing In a Forward t-0 Enter a forward Contract t-1 Execute Forwargd 0 S 100(1.1) Payoff 0 Payoff S-100(1.1 Profit- S - 100(1.1)

Answer 1

The strategy in the red box is not considered synthetic forward.

For creating a synthetic forward position, investor needs to sell an option, thereby using its premium along with own's self investment sometimes to buy an option, with both the sold and bought options having same strike price and expiration date.

For synthetic forward long position, investor needs to sell a put option, and use its premium along with own investment to buy a call option of same strike price and expiry, thereby resulting in paying a net option premium at t=0.

For synthetic forward short position, investor needs to sell a call option and buy put option of same strike price and expiration, thereby resulting in incoming of a net option premium at t=0.

In the red box, investor borrows and buys a stock. Moreover, the net payoff at t=0 is also 0. Hence, the strategy is not considered synthetic forward.