What is the method to create a synthetic long risk-free bond?

To create a synthetic long risk-free bond, the approach involves taking a long position in a stock while simultaneously establishing a short position in futures contracts. This method leverages the stock's expected performance and the short futures position to simulate the cash flows associated with a long risk-free bond.

A risk-free bond typically provides consistent interest payments and returns the principal at maturity. By going long on the stock, the investor captures the potential appreciation and dividends of the underlying asset. The short futures position helps replicate the interest income that would typically be received from holding a risk-free bond. The combination of these two positions creates a synthetic exposure that mirrors the characteristics of a risk-free bond, providing an effective tool for managing interest rate risk or mimicking bond-like cash flows in a portfolio.

The other options do not effectively create a synthetic long risk-free bond due to their structural characteristics. For instance, long stock and short bonds would not replicate the consistent cash flows of a risk-free bond, and long options and short futures involve derivatives that introduce different risk profiles. Long cash and short stocks could lead to unwanted exposure and do not align with the goal of mirroring a risk-free bond's cash flow.