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+Chapter 30: Stock Index Hedging Strategies 559 
+However, on the last day of trading, the cash-based index product will expire at 
+the opening price of the index. If one were to sell out his entire market basket of 
+stocks at the current bid prices at the exact opening of trading on that day, he would 
+sell his market basket at the calculated last sale of the index. That is, he would actu­
+ally be creating the last sale price of the index himself, and would thereby be remov­
+ing his position at parity. 
+The problem with this is that it is correct theory, but difficult to put into prac­
+tice. For example, if one has several million dollars of stocks to sell, he cannot expect 
+the marketplace to absorb them easily when they are all being sold at the last minute 
+on a Friday afternoon. We will discuss this more fully momentarily, when we look at 
+the impact of stock index arbitrage on the stock market in general. 
+There is another interesting facet of the arbitrage strategy that combines the 
+spread between the near-term future and the next longest one with the idea of exe­
+cuting the stock portion of the arbitrage at the close of trading on the day the index 
+products expire. Use of this strategy actually allows one to enter and exit the hedge 
+without having to lose the spread between last sale and bid or last sale and offer in 
+either case. Suppose that one feels that he would set up the arbitrage for 3 months if 
+he could establish it at a net price of 1.50 over fair value. Furthermore, if the fair 
+value of the 3-month spread is 2.10, but it is currently trading at 3.60, then that rep­
+resents 1.50 over fair value. One initiates the position by buying the near-term future 
+and selling the longer-term future for a net credit of 3.60 points. At expiration of the 
+near-term future, rather than close out the spread, one buys the stocks that comprise 
+the index at the last sale of the trading day, thereby establishing his long stock posi­
+tion at the last sale price of the index at the same moment that his long futures expire. 
+The resultant position is long stocks and short futures that expire in 3 months at a 
+premium of 3.60. Since the fair value of such a 3-month future should be 2.10, the 
+hedge is established at 1.50 over fair value. The position can be removed at expira­
+tion in the same manner as described in the previous paragraph, again saving the dif­
+ferential between last sale and the bids of the stocks in the index. Note that this strat­
+egy creates buying pressure on the stock market at expiration of the near-term side 
+of the spread, and selling pressure at the latter expiration. 
+The final way to exit from one's position is to remove it before expiration. 
+Sometimes, there are opportunities during the last two or three weeks before the 
+futures expire. If one hedged with long stock and short futures, the opportunities 
+to remove the hedge arise when the futures trade below fair value - perhaps even 
+at an actual discount to parity. If the futures never trade below fair value, but 
+instead continue to remain expensive, then rolling to the next expiration series is 
+often warranted.