Options - Futures Parity Theory-based Index Options Arbitrage Research

Stock index futures and options were the most important financial derivatives in the process of financial innovation, which are standardized contracts based on an index of stock price. Stock index futures and options can help to increase the adaptability of the market operation, and meet investors' demand for evading the market system risk. They also help to improve and enlarge the structure of investors, so as to promote the development and innovation of institutional investors. So futures and options based on stock index have many important functions, such as hedge, avoiding risk, and assets allocation and arbitrage and so on. For China, they will help to perfect the stock market functions and strengthen the security market's capacity of competition.According to the Cost of Carrying Pricing model, the theoretical prices of stock index futures should be depended on the price of stock spot market and holding cost of the spot till to the futures account day. Put-call Futures Parity indicates that the relative price of the put and call options with same underlying asset, exercise price and maturity date should equal to the difference of the temporal stock index price and exercise price. Otherwise, there will be an arbitrage, so risk less profits, existing between those options.The theoretical prices of stock index futures and options will shape a no-arbitrage area when trading cost is involved. The practical prices of those financial derivatives fluctuate in this price area, and risk less profits would be zero because there will be no arbitrage chance. But investors can get risk less profits through Cash and Carry Arbitrage or Reverse Cash and Carry Arbitrage when practical prices locating the interval out of the no-arbitrage area.This paper will make empirical analysis on the Taiwan's market of the weighted stock index futures and options, verifying the arbitrage chance and profits between those two markets. Then we will study the main factors affecting the arbitrage chance and the risk less profits. An explanation of the relationship is also given between those factors and the arbitrage chance and profits.Empirical results indicate that trading cost is one of main factors affected the arbitrage chance, that is, the chance will decrease obviously when trading cost increasing slowly. Profits from ex-liquidation strategy is marked higher than that from holding to maturity strategy Regression results tell that specifically time intervals in a trading day impact the arbitrage chance, but there is no evidence to explain the relationship between the specifically time intervals and arbitrage profits. Many factors can influence arbitrage profits, such as spread cost, price and market fluctuation degree, intervals to the maturity date and outside or inside degree of price.