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.
6. Answer: D. A futures conversion is the combination of a synthetic futures contract and the futures contract that underlies the options that comprise the synthetic futures contract. Each synthetic futures contract includes one put and one call option, and since each conversion includes a synthetic futures contract, both a conversion and a synthetic futures contract include one put and one call option.
7. Answer: A. When determining the breakeven points for a short straddle, the combined value of both premi