Index Arbitrage


DEFINITION of '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.

BREAKING DOWN 'Index Arbitrage'

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.

  1. Program Trading

    Computerized trading used primarily by institutional investors ...
  2. Market Index

    An aggregate value produced by combining several stocks or other ...
  3. Index

    A statistical measure of change in an economy or a securities ...
  4. Futures

    A financial contract obligating the buyer to purchase an asset ...
  5. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit ...
  6. Swap

    A derivative contract through which two parties exchange financial ...
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  2. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  3. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  4. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>
  5. Is there a difference between financial spread betting and arbitrage?

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