Difference between a stock and a synthetic stock
I got asked this question in and interview and couldnt really think of any good differences. I'm trying to figure out what is the difference between a stock and a synthetic stock (Created utilizing put-call parity).
Anyone have any idea or information on the matter?
Umm I'll take a shot
a stock you have a legal claim on the assets of the firm after debtors have been paid.
a synthetic stock you have two derivatives, and hence you are at risk that the counterparty of the derivatives does not perform. You also have no legal claim on the assets of the firm until you exercise the options
You can also do a synthetic stock using a risk free bond and equity futures. The risk free bond pays off at the same time that the futures matures, so you can use the proceeds to purchase the stock at the futures price, which theoretically is the same as owning the stock to begin with. It's synthetic because you have the equity exposure without owning the stock.
Its also cheaper than laying the full amount out for the stock position. You get the same exposure for a fraction of the cost.
Anyone else?
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