So, I have been hopping around in the CFAI books, but I’m a little lost on this. I have no idea what the rationale is behind a synthetic commodity as an investment. It is acheived by entering into a forward contract and buying a zero coupon bond at the same time. For example buying a zero coupon bond for $800 that is going to mature at $1,000 on the final date of the forward contract, while at the same time entering into the forward contract with the price being $1,000. Assume at expiration the spot price is $1,100. Then you would have made $100 on the contract and $200 on the bond(although I believe this is irrelevant). The formula is listed as: Spot Price-Forward Price+Zero Coupon bond=Spot Price. But there is no downside protection and you are unhedged. It seems to me that the two actions are totally unrelated. In put-call parity, there is potentially an arbitrage opportunity, which I get, but this doesn’t appear to be beneficial at all. Am I just totally lost on this or what?
i am not sure i follow your rationale. to me it seems straightforward that by investing in a zero coupon bond that matures at the exporation date of the forward and pays you f(0,T) allows you to pay your counterparty and take delivery of the commodity, or else the syntetic commodity position of going long a forward contract and long a zero coupon bond at time 0, has left you with the commodity at time T.