What Is “Index Arbitrage” and How Does It Relate to the Aggregate Index?
Index arbitrage is a trading strategy that exploits temporary price differences between the derivative contract (e.g. a futures contract) and the underlying aggregate index. Traders simultaneously buy the undervalued asset and sell the overvalued one to lock in a risk-free profit.
This activity helps keep the derivative price closely aligned with the underlying index value.
Glossar
Index Arbitrage
Mechanism ⎊ Index arbitrage, within cryptocurrency and derivatives markets, exploits temporary price discrepancies of an underlying asset across different exchanges or related instruments.
Underlying Index
Definition ⎊ The underlying index in financial derivatives refers to the benchmark or basket of assets upon which a derivative contract's value is based.
Aggregate Index
Construction ⎊ An aggregate index within cryptocurrency derivatives represents a synthesized metric derived from multiple underlying assets or instruments, frequently employed to gauge broad market sentiment or exposure.
Trading Strategy
Execution ⎊ A trading strategy, within cryptocurrency, options, and derivatives, defines a systematic approach to capitalize on anticipated price movements, fundamentally relying on precise order execution to realize projected returns.
Index
Benchmark ⎊ An index serves as a statistical measure representing the performance of a specific market segment or asset class.