when constructing synthetic commo pos, what should be the Face Value of the bond used to get a short synthettic pos? should it be the the fwd price @maturity or the fwd price @ maturity discounted at the borrowing rate? thanks! M.
I would worry about synthetic commodity positions for Level IV. Are you talking about cash and carry or reverse cash and carry transactions? Because in the real world synthetic commodity positions are really created by just buying the futures or doing a commodity swap. Commodities have a storage component so replicating is not like synthetic cash or stock where you just buy or sell a bond.
what does the whole notion of ‘synthetic’ refer to? have been wondering. in ay case it is the forward price to be paid at maturity. this is agreed at the beginning of the transaction…i think
Spot = Forward + Bond Cash and Carry (buy spot, sell synthetic) Buy the Spot Pay interest on loan to buy spot Sell the forward Reverse Cash and Carry (buy synthetic, sell spot) Sell the spot Take short proceeds and invest in bond Buy the forward The loan proceeds are always at the forward amount at delivery.
FYI, this was asked in the BSAS 2010 Q9/Part A