Define a ‘Synthetic Option’ and Explain Its Use in Non-Public Trading

A synthetic option is a position constructed using a combination of the underlying asset and other derivatives, such as futures or forwards, to replicate the payoff profile of a standard option. In non-public trading, synthetic options allow institutions to manage risk or take a desired market view without directly trading the standard option contract.

This can be useful for avoiding liquidity constraints or for executing a highly customized risk exposure not available on public exchanges.