23 lines
1.7 KiB
Plaintext
23 lines
1.7 KiB
Plaintext
461
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The stock market is but a mirror which . . . provides an image of the underlying or
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fundamental economic situation.
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—John Kenneth Galbraith
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■ Intramarket Stock Index Spreads
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Spreads in carrying charge markets, such as gold, provide a good starting point for developing a theo-
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retical behavioral model for spreads in stock index futures. As is the case for gold, there can never
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be any near-term shortage in stock indexes, which means spreads will be entirely determined by
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carrying charges. As was explained in Chapter 30, gold spreads are largely determined by short-term
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interest rates. For example, since a trader could accept delivery of gold on an expiring contract and
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redeliver it against a subsequent contract, the price spread between the two months would primarily
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reflect financing costs and, hence, short-term rates. If the premium of the forward contract were sig-
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nificantly above the level implied by short-term rates, the arbitrageur could lock in a risk-free profit
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by performing a cash-and-carry operation. And if the premium were significantly lower, an arbitra-
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geur could lock in a risk-free profit by implementing a short nearby/long forward spread, borrowing
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gold to deliver against the nearby contract and accepting delivery at the expiration of the forward
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contract. These arbitrage forces will tend to keep the intramarket spreads within a reasonably well-
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defined band for any given combination of short-term interest rates and gold prices.
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The same arguments could be duplicated substituting a stock index for gold. In a broad sense this
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is true, but there is one critical difference between stock index spreads and gold spreads: Stocks pay
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Spread Trading in
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Stock Index Futures
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Chapter 32 |