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. Indexing

    In the financial markets, indexing can be used as a statistical ...
  2. Index Futures

    A futures contract on a stock or financial index. For each index ...
  3. Index

    An index measures the performance of a basket of securities intended ...
  4. Total Return Index

    A type of equity index that tracks both the capital gains of ...
  5. Price-Weighted Index

    A stock index in which each stock influences the index in proportion ...
  6. Index Fund

    An index fund is a portfolio of stocks or bonds that is designed ...
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  1. Is it possible to invest in an index?

    While you cannot buy indexes, which are just benchmarks, there are three ways for you to mirror their performance. Read Answer >>
  2. What is the difference between arbitrage and speculation?

    Arbitrage and speculation are very different strategies. Arbitrage involves the simultaneous buying and selling of an asset ... Read Answer >>
  3. How Do I Find Mutual Funds That Track Indexes?

    Two good sources for finding index funds are Fidelity Investments and Vanguard. Read Answer >>
  4. What is index option trading and how does it work?

    Learn about stock index options, including differences between single stock options and index options, and understand different ... Read Answer >>
  5. How do indexes determine which stocks are removed or added to them?

    Stock indexes are formed based on the kinds of stocks or financial securities they want to track. For example, the Standard ... Read Answer >>
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