1 / 6

Futures Arbitrage

Futures Arbitrage. Program Trading. Essentially a cash and carry, or reverse cash and carry, arbitrage between an index and a basket of stocks related to the index.

newman
Download Presentation

Futures Arbitrage

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Futures Arbitrage

  2. Program Trading • Essentially a cash and carry, or reverse cash and carry, arbitrage between an index and a basket of stocks related to the index. • One of the confusing factors about program trading is that if the basket pays income (ie dividends) during the arbitrage period, then there will be a payment necessary if the underlying is “shorted” and a receipt if the underlying is bought.

  3. Your expectation should be: (3/12) F = 405 * (1.05) = 409.97 Program Trading cont’d • Assume you have $10 million in credit to play with. The index is at 405, but the 3 month futures is trading for 420, while a 5% riskless rate is available. Thus, futures are too high, so sell futures, buy stocks, and borrow.

  4. Program Trading cont’d • Difficulty is that futures is on an index with 500 stocks, and trading in 500 stocks at once is near impossible. So, use a proxy basket of 15 or so stocks and measure relation of basket with index (Beta). • Also, stocks are expected to pay a dividend, in total, of $12,000, across the next 3 months. As you will buy stocks, you will get the dividends.

  5. Value $10,000,000 portfolio contracts b -------------- * contracts, or, -------------- * .90 = 42.86 Value $210,000 futures Program Trading cont’d • If the basket beta with the index is .90, you will need: to cover the $10,000,000 in funds available. Further, you will pay: $10,000,000 * (1.05)(3/12) - $10,000,000 = $122,722.34 in interest on the borrowings.

  6. Program Trading Results

More Related