Index Arbitrage

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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.

RELATED TERMS
  1. Program Trading

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

    A statistical measure of change in an economy or a securities ...
  3. Market Index

    An aggregate value produced by combining several stocks or other ...
  4. Arbitrage

    The simultaneous purchase and sale of an asset in order to profit ...
  5. Futures

    A financial contract obligating the buyer to purchase an asset ...
  6. Implied Volatility - IV

    The estimated volatility of a security's price.
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RELATED FAQS
  1. 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 >>
  2. Is there a difference between financial spread betting and arbitrage?

    Financial spread betting is a type of speculation that involves a highly leveraged derivative product, whereas arbitrage ... Read Full Answer >>
  3. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  4. Why do companies enter into futures contracts?

    Different types of companies may enter into futures contracts for different purposes. The most common reason is to hedge ... Read Full Answer >>
  5. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
  6. What are the goals of covered interest arbitrage?

    The goals of covered interest arbitrage include enabling investors to trade volatile currency pairs without risk as well ... Read Full Answer >>

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