A forward contract simply refers to a deal that executes some time in the future. You aren't buying 100 shares of NFLX now. You agree to buy 100 shares of NFLX in September, at a price of $400.
A synthetic forward achieves the same goal, except without actually involving a forward contract. Instead, you use a combination of puts and calls to create the same scenario, only in a different way.
You want to recreate that forward to buy 100 shares of NFLX at $400, expiring in September. You buy a call contract (an option to purchase the shares) for 100 shares of NFLX at $400, with a September expiration. Then you write a put, i.e. you sell the option for someone else to sell you 100 shares of NFLX at $400 a share, expiring in September.
So...you're buying a call and selling a put. Both have the same strike price and expiration. (You can create a synthetic short forward contract by selling a call and buying a put.)
If NFLX rises to $420 between now and September, you'll exercise your call (the put will expire unexercised) and buy the shares for $400. If shares of NFLX drop to $380, the party who purchased your put contract will exercise it, forcing you to buy shares of NFLX at $400 a share (the call will expire unused). In either case, you end up buying shares at $400...same as if you purchased the forward contract.
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Finance: What is a Derivative?23 Views
finance a la shmoop what is a derivative? well it's derived it's a something taken
from something else like a derivative of hot weather is thirst a derivative of [Girl takes sip of glass of water on a beach]
hunger is well you know crankiness that's diva thing you get there...
derivative of a 1/32 quarterback rating in the NFL is like serious wealth yeah
yeah discount double shmoop yeah look for it be on there with aaron
and a derivative of a stock or bond or other security is a something which
derives its value based on the performance of that underlying security
there are basically two flavors of derivative put options ie the right to [Ice cream flavors appear]
sell a security at a given price over a given time period and a call option, ie
right to buy a security at a given price over a given time period
well the price of that option is derived from the price of the security and a few
other factors like strike prices and duration and all that stuff
colonel electric the downgraded new version of General Electric is trading [Colonel Electric appears in a suit]
for 25 bucks a share a derivative of its share price is sold in the form of a
call option with a $30 strike price expiring about 90 days from now on the
third Friday of the end of that month well investors pay a price albeit
probably a small one for the right to then pay 30 bucks a share for colonel [Call option appears for colonel electric]
electric at any time in the next 90 ish days until that option expires making the bet
that the stock will go well above 30 bucks a share in that time period that
call option is thus a derivative of the colonel electric primary stock price got
it if you really want to get personal well here's the ultimate form of
derivative [Baby laying down]
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