An index arbitrage involves buying the cheaper portfolio and selling the more expensive portfolio where:

Question

Quizplus · Accepted Answer

Index arbitrage involves buying a portfolio that is cheaper and selling a more expensive one to profit from the price difference. In this case, one portfolio consists of an index future while the other portfolio tries to replicate the performance of the underlying index. This is a common strategy used by investors to exploit temporary pricing inefficiencies in the market. Option arbitrage (answer C) involves buying and selling options on the same underlying asset, and index arbitrage does not typically involve options. Answer A involves two different stock indexes which are not related to index arbitrage. Answer D involves both futures and options on the same underlying index, but it is not clear which portfolio is cheaper or more expensive, so it is not a definitive answer. Answer E is incorrect because B is the correct answer.

An Index Arbitrage Involves Buying the Cheaper Portfolio and Selling