Exchange-traded Funds (etfs) Arbitrage Mechanism,

Exchange Traded Fund(sETF)is one of the funds in the world which rapidly grows. By Dec.31st, 2005, whose amounts of assets have reached almost 360 billion dollar. In Asia, including Hong Kong SAR of China, Singapore, Korea and Taiwan of China, there have been developing ETF mostly in recent years. In this environment full of indexing investment, the first ETF——Shangzheng50 Exchange Traded Funds was born on Nov.29th, 2004 and listed in Shanghai Stock Exchange on Feb.23th, 2005. Since then, the financial innovations begin with the putout of 50 ETF.ETF can be purchased and redeemed with a basket of stocks, and also can be traded in Securities Exchange, permitted short selling, and its futures and other derivative products will be able to hedge risk. However, because of stock market environment and legal constraints in China, domestic 50ETF can not be permitted short selling, and does not have derivatives and futures mechanism for hedging risk. Then, it raises the following questions, in our present market environment and legal framework, what characteristics do 50ETF transaction mechanisms have? What is the meaning of the arbitrage to ETF? And as one of the most important functions of arbitrage trading, how to play its due role, and how to further improve and develop the ETF products and related derivatives? Effective solution to these problems for the future of our fund products (particularly indexing funds) and the derivative products is extremely important.There are four chapters of this content and a concluding remark. The first chapter is primarily a profile of the basis of ETF. The discussion focused on the dual trading mechanism of generalized ETF product.