What Is “Index Arbitrage” in Crypto Futures?
Index arbitrage is a strategy where traders simultaneously buy or sell the underlying cryptocurrency in the spot market and take an equal and opposite position in the cash-settled futures contract, specifically when the futures price deviates from the fair value implied by the reference index. The goal is to profit from the convergence of the futures price to the reference index at expiration, locking in a risk-free profit.
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.
Fair Value
Valuation ⎊ Fair value represents the theoretical price of a derivative contract, distinct from its current market price on a specific exchange.
Reference Index
Benchmark ⎊ A reference index serves as the benchmark price for derivatives contracts, particularly in cryptocurrency markets where multiple exchanges trade the same asset.
Spot Market
Definition ⎊ The Spot Market is the financial venue where cryptocurrencies or other underlying assets are traded for immediate settlement, meaning the exchange of the asset and cash occurs almost instantaneously at the prevailing market price.