35 lines
2.7 KiB
Plaintext
35 lines
2.7 KiB
Plaintext
Cbapter 30: Stock Index Hedging Strategies 561
|
||
Another risk that the arbitrageur faces is that of changes in the dividend payout
|
||
of the stocks in the index. Suppose that he is long stocks and short futures. If there
|
||
are enough cuts in dividend payout, or dividend payments are delayed past the expi
|
||
ration date of the futures, then he will lose some of his return. Arbitrageurs who are
|
||
short stocks and long futures would have similar problems if dividend payout were
|
||
increased especially if a large special dividend were declared by a company that ,is
|
||
a major component of the index - or payment dates were accelerated.
|
||
If one holds the arbitrage until expiration, he will be able to unwind it at parity.
|
||
However, if he decides to remove the arbitrage before expiration, he might incur
|
||
increased costs that would harm his projected return. Instead of selling his stocks at
|
||
the last sale of the index, as he is able to do on expiration day, he would have to sell
|
||
them on their bids, a fact that could cost him a significant portion of his profit.
|
||
In a later section, where we discuss hedging the futures with a market basket of
|
||
stocks that does not exactly represent the entire index, we will be concerned with the
|
||
greatest risk of all, "tracking error" - the difference between the performance of the
|
||
index and the performance of the market basket of stocks being purchased.
|
||
IMPACT ON THE STOCK MARKET
|
||
The act of establishing and removing these hedge positions affects the stock market
|
||
on a short-term basis. It is affected both before expiration and also at expiration of
|
||
the index products. We will examine both cases and will also address how the strate
|
||
gist can attempt to benefit from his knowledge of this situation.
|
||
IMPACT BEFORE EXPIRATION
|
||
When bullish speculators drive the price of futures too high, arbitrageurs will attempt
|
||
to move in to establish positions by buying stock and selling futures. This action will
|
||
cause the stock market to jump higher, especially since positions are normally estab
|
||
lished with great speed and stocks are bought at offering prices. Such acceleration on
|
||
the upside can move the market up by a great deal in terms of the Dow-Jones
|
||
Industrials in a matter of minutes.
|
||
Conversely, if futures become cheap there is also the possibility that arbi
|
||
trageurs can drive the market downward. If positions are already established from
|
||
the long side (long stock, short futures), then arbitrageurs might decide to unwind
|
||
their positions if futures become too cheap. They would do this if futures were so
|
||
cheap that it becomes more profitable to remove the position, even though stocks
|
||
must be sold on their bid, rather than hold it to expiration or roll it to another series. |