Financial Risk Manager Part 1
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During a session on stock index arbitrage with junior risk analysts, a risk manager from an investment firm underscores the importance of arbitrage trading strategies in maintaining the efficiency of financial markets and elaborates on the implementation of an index arbitrage strategy. What is the correct statement regarding stock index arbitrage?
A
It involves purchasing one stock index futures contract and selling a different stock index futures contract.
B
It involves purchasing a basket of stocks that are members of an index while selling other stocks in the same index.
C
It ensures that the price of the index will always correspond to the value of a portfolio of the underlying stocks, even if the portfolio is not tradable.
D
It involves selling a stock index futures contract and purchasing the portfolio of stocks underlying the index.