Benefiting from differences between the futures price of a stock index and the level of the underlying index is known as index _________.
A) Inversion
B) Trading
C) Hedging
D) Arbitrage
E) Speculating

Question

Quizplus · Accepted Answer

Index arbitrage involves simultaneously buying or selling a portfolio of stocks and futures contracts to take advantage of price differences between the two. This can include using the futures market to hedge an existing stock portfolio or exploiting temporary mispricings between the futures price and the actual index level through quick trades.

Benefiting from Differences Between the Futures Price of a Stock