Synthetic Forward Contract

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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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RELATED FAQS
  1. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  2. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  3. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  4. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
  5. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
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    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>

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