A customized, hybrid, and artificially created financial instrument which combines an underlying price on a cash position with the price of a financial derivative. In other words, a synthetic replicates the features (usually the price pattern) of another instrument using the combined features of a set of other assets. Synthetics may include synthetic call, synthetic put, synthetic stock, etc.
For example, an investor can create a synthetic call (or a protected long sale) by taking a long position in a stock, buying at the same time a put option on that stock, and lending the present value of the call’s strike price in accordance with the put-call parity relationship.
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