Index Futures Arbitrage

The whole paper discusse the arbitrage of index future based on Hengsheng Index Futures trading in Hongkong market. The aim is to solve kinds of problems and avoid the risk when using index future arbitraging, as well as to design relative arbitraging strategy and demonstrate it. All of these job is to get the biggest profit bearing the least risk..The pric of index future and stock have close relationship. When there is unbalance between future and stock and this warp beyond the trading cost, then investors can long stock and short future or short stock and long future to get this riskless chance. Index future arbitrage doesn't mean there is no risk during the process. By contraries, there is full of risk on such course: choosing of stock, tracking error, trading cost, dividend, settlement etcThe key point of index arbitrage is to constract proper arbitrage portfolio. The core problem is to confirm the arbitrage bound. When establishing the portfolio, completely replicating the index is better than partially replicating. The tracking error of the former is less than the latter, but fully replicating the index costs much more, the operation is also much harder. Through setting up two different arbitrage strategies considering all costs of trading futures and stock, the paper gives the pricing model of index future and estimates the main parameter. After getting the arbitrage bound, the paper verifies the opportunities and calculates the profit under the designed early unwinding and roll over strategy. Finally, the yearly average arbitrage profits is about 15% using these process.