Synthetic Forward Contract

DEFINITION of 'Synthetic Forward Contract'

A position in which the investor is long a call option and short a put option. The synthetic forward contract requires that both options be held simultaneously by a single investor, that have the same strike price and expiration date. This investment strategy mimics a regular forward contract, and is also called a synthetic futures contract. The investor will typically pay a net option premium when executing a synthetic forward contract, but part of the long position cost is offset by the short position.

BREAKING DOWN 'Synthetic Forward Contract'

Synthetic forwards can help investors reduce their risk, although as with trading futures outright, investors still face the possibility of significant losses if they don't implement proper risk-management strategies. a major advantage of synthetic forwards is that a "forward" position can be maintained without the same types of requirements for counterparties. Some types of synthetic forward contracts include trigger forward contracts and at-maturity trigger forward contracts.

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