Synthetically creating risk/return profile

CFA Level III Derivatives
#1

Question: To synthetically creating the risk/return profile of an underlying commmon equity security:

Correct Option: Buy the corresponding future contract and invest in T-bill.

I don’t understand the question as well as the answer. Any take on this one?

Thanks.

#2

You’re trying to pretend that you own the underlying.

To do so, you take the long position in a futures contract, and buy a bond that matures on the day the futures expires; the par value of the bond will be the futures price, so yo have enough to pay for delivery. It’s a risk-free bond, so you haven’t introduced any additional risk.

Note: this doesn’t work if the underlying has cash flows between the date you enter into the futures and the expiration date.

#3

It’s useful for several questions to remember the formula: stock = risk-free bond + stock futures.

You can change up the formula for any component, like so: risk-free bond = stock - stock futures.

#4

what about synthetic cash? is it sell futures + sell bond?

#5

I think that if you sell a bond you get real cash, not synthetic cash.

#6

synthetic cash = hold stock + short stock futures

you will earn the risk free rate, essentially holding cash.