Synthetic stock/cash position

[RoccoLee]

I am really confused about the logic in synthetic stock/cash postion.
Creating a a synthetic stock/cash position, needs to buy/sell specific number of futures.
But why we need to incorporate the risk-free in the formula? and why we need to incorporate the dividend yield to calculate the shares of stock created in the sytheic position?

 

[varunvajpayee]

Synthetic Stock= You get the exposure of the stock without buying the underlying (Stock) itself=> You implement it buy buying the future contracts.
Synthetic cash= You reduce the exposure of the stock without selling the underlying(stock) itself=> You implement it by selling the future contracts.
Future Value= Spot price (1+Risk free rate)+future value of the dividends.
Reasons to create synthetic positions:-
1) Low trasaction fees because you are NOT selling and buying the underlyings. traction feeds in forwards/futures are less in comparisons.
2) Futures are highly liquid.

 

[S2000magician]

We incorporate the risk-free rate because cash is assumed always to grow at the risk-free rate; thus, we need to consider the amount of cash we would have at the expiration of the futures contracts.
I wrote an article about the synthetics that may be of some help here: http://financialexamhelp123.com/the-synthetics-cash-equity-and-fixed-inc...
As for the dividend yield, this is needed only to determine the number of shares of stock, not to determine the number of futures contracts required.

 

[RoccoLee]

Thank you very much!

 

[RoccoLee]

S2000magician wrote:
We incorporate the risk-free rate because cash is assumed always to grow at the risk-free rate; thus, we need to consider the amount of cash we would have at the expiration of the futures contracts.
I wrote an article about the synthetics that may be of some help here: http://financialexamhelp123.com/the-synthetics-cash-equity-and-fixed-inc...
As for the dividend yield, this is needed only to determine the number of shares of stock, not to determine the number of futures contracts required.

So the number of shares of stock in the beginning is (Nf * multiplier) / (1+Rf)t; at the end is Nf * multiplier.
Is it correct?

 

[S2000magician]

RoccoLee wrote:

S2000magician wrote:We incorporate the risk-free rate because cash is assumed always to grow at the risk-free rate; thus, we need to consider the amount of cash we would have at the expiration of the futures contracts.
I wrote an article about the synthetics that may be of some help here: http://financialexamhelp123.com/the-synthetics-cash-equity-and-fixed-inc...
As for the dividend yield, this is needed only to determine the number of shares of stock, not to determine the number of futures contracts required.

So the number of shares of stock in the beginning is (Nf * multiplier) / (1+Rf)t; at the end is Nf * multiplier.
Is it correct?

Nope.
The number of shares of stock at the beginning is (Nf × multiplier) / (1 + δ)^T; the number of shares at the end is Nf × multiplier.

 

[RoccoLee]

S2000magician wrote:

RoccoLee wrote:

S2000magician wrote:We incorporate the risk-free rate because cash is assumed always to grow at the risk-free rate; thus, we need to consider the amount of cash we would have at the expiration of the futures contracts.
I wrote an article about the synthetics that may be of some help here: http://financialexamhelp123.com/the-synthetics-cash-equity-and-fixed-inc...
As for the dividend yield, this is needed only to determine the number of shares of stock, not to determine the number of futures contracts required.

So the number of shares of stock in the beginning is (Nf * multiplier) / (1+Rf)t; at the end is Nf * multiplier.
Is it correct?

Nope.
The number of shares of stock at the beginning is (Nf × multiplier) / (1 + δ)^T; the number of shares at the end is Nf × multiplier.

many thanks

 

[S2000magician]

You’re quite welcome.