Futures&Index Arbitrage - free lunch??

SwingToWin

SwingToWin

Dear fellow traders,
I just noticed something strange and would like to hear your opinion about it:

At the moment I'm typing the SMI (Swiss Stock Exchange Index) is trading as following:
Index (CFD at IB): 8988
Future March (expiration 20.03.): 8901
The spread for index and futures are about 2 point. The difference between future and index is 87 points.

Am I right that on 20.03. at market close the future must equal to the index??

So basically, if I went long the future now and short the CFD I would make a guaranteed profit?

Expenses:
- 17,70 points in financing costs for the index (8988*2,4% / 12 for nearly 1 month).
- Commission (neglectable)

Profit:
87 points in difference IF the future equals to the CFD on 20.03. But that should be, am I right?

Looking forward to hearing your opinions!

Kind regards,
SwingToWin
 
SwingToWin said:
Futures have no financing costs

Index has: MarketValue x Interest x Time
MarketValue: 8988 (I take points instead of the MarketValue, same result)
Interest: 2,40%, see https://www.interactivebrokers.com/en/index.php?f=interest&p=cfds
Time: I calculated 1/12; in fact it would be slightly less because today it's 24.02. and it will settle on 20.03. and February only has 28 days.
So I come up with 17,70 USD.
More...
Sure, let's assume zero for the futures.

On the index, I think you're a wee little bit off. Firstly, the interest is not 2.40%, it's -2.40%. Secondly, as I am sure you're aware, there's a small matter of a dividend, which is projected to be worth arnd 108.5 index points in March (index goes ex-div on the 18th March, if I am not mistaken). If my very quick and dirty arithmetic is correct, this puts your actual financing rate for this index short at, very roughly, 16% annualized or thereabouts. You should adjust your calculation accordingly.
 
Thanks Martinghoul for the quick reply. I *knew* that it would be too good to be true ;)

2,40 or -2,40 doesn't make a difference. Anyway I need to *pay* those 2,40%. But I wasn't aware of the dividend! Thanks for that hint, I'm going to check it out now :)
 
SwingToWin said:
Thanks Martinghoul for the quick reply. I *knew* that it would be too good to be true ;)

2,40 or -2,40 doesn't make a difference. Anyway I need to *pay* those 2,40%. But I wasn't aware of the dividend! Thanks for that hint, I'm going to check it out now :)
More...
The sign does make a difference. You've sold the index for cash. You're lending cash at the rate given on the right-hand side, which means you're receiving a rate of -2.4% on your cash (that's a function of Swiss money mkt rates being negative, as well as the ridiculously wide mkt from your not-so-friendly broker). Receiving a negative rate, as you point out, is equivalent to paying a positive one, et voila.

The point is that the rough all-in financing rate you should use for the forward calc is: Dividend - Funding = 14% - (-2.4%) = 16.4%
 
Hi,

Not to deviate away from your OP. But I did not want to create another thread. I have been very much interested in doing index arb. I have tested the idea intraday. Buy/sell future while simultaneously buy/sell cash index. And collect pennies. I want to test it live. But the big hurdle is, margin requirement on cash index is over 30k for.. S&p 500. Even though the risk is minimum as the band between future price and cash index is not going to expand forever. Anyone know of a broker that specializes in index arb? Perhaps they have lower margin requirements?
 
I think Futures Arbitrage was arbitraged away decades ago. Same as any form of basis trading.

You can probably design a small basket with a looser correlation to the Dow, but that design would be your secret sauce ..like a multivariate method of pairs trading. IBKR has a basket trading and hedging functionality you can look up.
 
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xandman said:
I think Futures Arbitrage was arbitraged away decades ago. Same as any form of basis trading.

You can probably design a small basket with a looser correlation to the Dow, but that design would be your secret sauce ..like a multivariate method of pairs trading. IBKR has a basket trading and hedging functionality you can look up.
More...

I think you're referring to dispersion trading - and nope, that's also going to be fuly automated away from retail.
 
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