Index arbitrage

What is Index arbitrage?

Index arbitrage, also known as index arbitrage trading, is one style of arbitrage wherein an investor attempts to make a profit from the difference in the actual price of the stock and the predicted or misrepresented futures price. When index arbitrage trading is successful, the investor can make a gain by exploiting these inefficiencies in the market. The time span to carry out an index arbitrage strategy is very lean due to the current price simply not reflecting the most recent information about the particular currency.

Example

Suppose a trader comes across futures for S&P 500 and buys (sells) them while simultaneously selling (buying) the stocks that underlie the S&P 500 index. This way she can earn gains by capturing the difference of the temporarily inflated basis between both baskets. The point at which the price difference exists is often expressed at the block call.