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index arbitrage |
Also found in: Wikipedia | 0.06 sec. |
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Index Arbitrage An investment strategy that attempts to profit from the differences between actual and theoretical futures prices of the same stock index. This is done by simultaneously buying (or selling) a stock index future while selling (or buying) the stocks in that index. Notes: This is done with program trading. Using software that monitors both a stock index and futures contracts on the index, traders can be notified when there is a larger than normal gap.Index arbitrage An investment trading strategy that exploits divergences between actual and theoretical futures prices. An example is the simultaneous buying (selling) of stock index futures (i.e., S&P 500) while selling (buying) the underlying stocks of that index, capturing as profit the temporarily inflated basis between these two baskets. Often, the point at which profitability exists is expressed at the block call as the number of points the future must be over or under the underlying basket for an arbitrage opportunity to exist. See: Program trading.
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? Mentioned in | ? References in periodicals archive | ||
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| In some cases, traders who want to buy or sell large blocks may put them in as market-on-close orders, hoping that the orders will be seen as related to some index arbitrage activity, rather than as a trade based on fundamentals. The secrets of programme trading, index arbitrage and block deals. Make no mistake about it, the long-run survival and vitality of our domestic securities market does not depend primarily on the introduction of circuit breakers, prohibitions on program trading, restrictions on index arbitrage, tighter short-sale restrictions, or any other intrusive regulatory mechanisms. |
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