Chapter 5 Practice Question Answers
- 1. Answer: B. A synthetic long call occurs when an investor is long a futures position and long a put position. This combination is known as a synthetic long call because it acts in the same way as a long call on the futures position without being an actual call position.
- 2. Answer: C. A short synthetic investment requires a short stock or futures contract position coupled with either a short put or a long call. When the short stock or futures contract is coupled with a short put, a synthetic short call is created.
- 3. Answer: C. A synthetic long futures position is the combination of a long call and a short put, both with the same strike price and expiration date. Thus, because different options may have different strike prices, it is not correct to say that a synthetic long futures contract includes any long call and short put for the same underlying contract. It is a synthetic short futures position, and not a synthetic long futures position, that combines a short call and a long put with the same strike and expiration.
- 4. Answer: A. A forward conversion combines a long futures contract with a short call and a long put (a short synthetic). On the other hand, a reverse conversion combines a short futures contract with a long call and a short put (a long synthetic).
- 5. Answer: B. If an investor is long a futures contract and then buys puts on the same contract, she has created a synthetic long call. An investor who is long a futures contract must short a call on that contract to create a synthetic put (a synthetic short put in this case). A synthetic short futures contract is created when an investor is short a call and long a put, each of which have the same strike price, on the same underlying contract. Finally, a forward conversion occurs when an investor combines a long futures contract with a short call and a long put (a short synthetic).
- 6. Answer: D. A futures conversion is the combination