Synthetic Call
Description
An investment strategy that mimics the payoff of a call option. A synthetic call is created
by purchasing the underlying asset, selling a bond and purchasing a put option. The strike
price on the put option is equal to the face value of the bond, which serves as the exercise
price of the synthetic call.
A synthetic call produces the same overall payoff as a call option. The synthetic call will
finish in the money when the price of the underlying asset is greater than the face value
of the sold bond at the time of expiration. It will be out-of-the-money when the value of
the bond is greater than that of the underlying asset. When the synthetic call is in the
money, the profit is the difference between the price of the underlying asset and the
face value of the bond. If the call finishes out of the money, the put option absorbs
the loss from the underlying asset, with the exercise price of the put paying for
the bond.
P/L Profile
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