Synthetic Futures Contract

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Synthetic Futures Contract

1. The purchase of calls and the sale of puts with the same expiration date and strike price.

2. The purchase of puts and the sale of calls with the same expiration date and strike price.

In both cases, the position creates the effect of holding a long position (for the first definition) or a short position (for the second) on a futures contract.
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References in periodicals archive ?
A synthetic futures hedge is favored by some brokers because the client will have to pay two commissions for the options versus just one for a futures hedge.
One of the most popular synthetic futures hedge involves buying an out-of-the-money put (call) and selling an in-the-money call (put) such that the hedge initially earns a net cash flow for the hedger.
Although interest rate swaps have been described as synthetic financial instruments and puts and calls can be combined to create synthetic futures contracts, we are unaware of previously created synthetic accounting events.
For example, a trader might initiate a long synthetic futures position, as above, and offset this by selling the actual underlying futures contract.
More importantly for a coffee futures trader this would present an opportunity to go long a synthetic futures contract at .25 cheaper than an actual futures position.