Synthetic risk free asset = long stock - stock index futures (i.e., short postion)
Can someone elaborate this formula in a manner that makes more sense.
My problem is that 1) if you are long stock, you have already used cash (which would have yielded say risk free rate) to buy a risky asset and 2) if you are short equity futures, all you’ve done is to lock in your gain on equity perhaps. Alternatively, if you are say hedge fund, where capital is precious, when you buy anything, you borrow money in the hopes that risky asset (equity) more than covers the cost of borrow and if you short stock (at least you get a rebate on the shorts), but in this formula shorting index futures is no different than buying stock since it uses capital. Perhaps I’m missing something here, but I don’t get how if I’m long say SPY (S&P 500) stock and short S&P futures that I would be long risk free (say Treasuries) asset. Please help.