index arbitrage


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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.

Index Arbitrage

A form of arbitrage in which an investor takes advantage of discrepancies in price between a stock index and a futures contract on that index. Index arbitrage occurs when an arbitrageur takes one position on a stock index (or on the individual stocks underlying the index) while taking an equal but opposite position on a futures contract on the index. He/she is then able to profit from the difference in the price between the two.

index arbitrage

An investment strategy that takes advantage of the price discrepancies between an asset or group of assets and an index futures contract on the asset. For example, a money manager might attempt to earn a profit for shareholders by selling an overpriced stock index futures index and buying the underlying stock. See also stock-index arbitrage.
References in periodicals archive ?
He became a member of Credit Suisse in index arbitrage in 1996, after beginning his career at O'Connor & Associates as an options trader.
He traded index arbitrage in over 40 indices and hedged various equity options strategies during his time at Wolverine Trading.
Or, at least it was for Jared Dillian, a Lehman Brothers index arbitrage trader from 2001 to 2008.
Rising index arbitrage activity in Asia will add liquidity to the region's equity markets and create a healthy environment for the cross-listing of indexes between bourses, market participants say.
23] Index arbitrage studies provide further insight into arbitrage profitability.
However, share price index arbitrage involves transactions in both the futures and share markets, and thus account must be taken of the taxes and transaction costs in the two markets.
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.
Other topics Mayer provides insights into are the futures and options markets along with index arbitrage, and the sophisticated details revealed on the manipulation of them.
While the merits of index arbitrage are debatable, its influence on financial markets is quite clear.
Very few of the survey respondents considered themselves "very familiar" with program trading or index arbitrage.
Stock index arbitrage activity by broker/dealers is controversial because broker/dealers have a comparative advantage in the cost of executing the stock portion of the trade.
It is one of these strategies that the media and Wall Street usually are refering to when they speak of program trading: stock index arbitrage.