EXHIBIT 6.7 Long stock and synthetic long stock with 71 days to
expiration.
Looking at this exhibit, it appears that being long the actual stock
outperforms being long the stock synthetically. If the stock is purchased at
$51.54, it need only rise a penny higher to profit (in the theoretical world
where traders do not pay commissions on transactions). If the synthetic is
purchased for $2, the stock needs to rise $0.46 to break even—an apparent
disadvantage. This figure, however, does not include interest.
The synthetic stock offers the same risk/reward as actually being long the
stock. There is a benefit, from the perspective of interest, to paying only $2
for this exposure rather than $51.54. The interest benefit here is about
$0.486. We can find this number by calculating the interest as we did earlier
in the chapter. Interest, again, is computed as the strike price times the
interest rate times the number of days to expiration divided by the number
of days in a year. The formula is as follows:
Inputting the numbers from this example:
The $0.486 of interest is about equal to the $0.46 disparity between the
diagrams of the stock and the synthetic stock with 71 days until expiration.