All,
On the beginning of the section on synthetic positions, there is a statement which I don’t understand
“Synthetic positions more precisely replicate the same initial investment and ending results tha twould have occurred if the replicated position had been owned instead”
Can anyone clarify this?
The return should be roughly the same investing in a synthetic position relative to owning it. Throughout the chapter they show how it works.
Buy future with NP of X, at start it’s the same as owning Y stock with reinvesting dividends, get Z stock at end. All of it works around Long stock + Short Future = Long Term bond. Rearrange the terms and you can see it happens. So for example a synthetic equity position = going Long the Stock + Buying Future and Investing in long term bond.
Yes, it’s clearer now, but synthetic positions are more precise in replicating the intended position relative to what other option?