, 10n, 443Reverse splits, 102Risk, 327, 330Risk analysis, 327±368convergences, 343corporate events, 343, 344correlations, 342, 343credit risk, 355, 356delta, 341, 342dividends, 351, 352execution, 353, 354®nancing risk, 344±351gamma, 342human psychology, 328, 329interest rate risk, 344, 345interest rates, 339, 340internal risk management, 336, 337legal/compliance risks, 356±358leptokurtic events, 365±368magnitudes (®rst-/second-orderrisk), 339, 340methodology, 330±336other risks, 354, 355, 358, 359outright risk, 345, 346
505
prices, 341±344reporting, 336short squeezes, 353spread risk, 346, 347, 351time horizon, 337, 338value-at-risk, 359±365. See alsoValue-at-risk (V@R)Risk arbitragebasics, 423±426bene®ts of, 457BT/MCI, 434±439CCI/TRV, 449±453convergence, 433±445dividends, 447execution, 446explicit convergence, 13±15, 426, 427HSBC/CCF, 453±457opportunity, 427±431pro®tability, 431±433short squeeze, 447±449SPLS/ODP, 439±443timing, 444, 445underlying concept, 423Risk aversion, 329Risk neutrality, 329Risk-reward analysis, 106Risk seeking, 329RiskMetrics, 359, 361, 363, 364Roll, 399, 400. See also Long-term rolls;Short-term rollsRolling upon interest, 402±407Royal Dutch Shell, 474±480Rule 80a (trading collars rule), 95, 96Rule 109-1 (up-tick rule), 94, 95Rule-based interruptions, 93Russian Exchange, 11S&P, 239S&P 500, 238S&P 500 SPDRs, 53, 54S&P 1500 Composite, 238Screen-based trading, 92SD, 70SEC, 356, 357Second-order exposure, 34Second-order risk, 339nSecurities and Exchange Commission(SEC), 356, 357Securities-driven transactions, 83, 85±88
506
INDEX
Settlementcross-listed stocks, 74, 75date convention, 70±72futures, 117, 118general process, 67, 70money markets, 175stocks, 71Settlement date (SD), 70Settlement ¯ows, 272Share buybacks, 67Short selling, 94, 95, 105Short squeezeindex arbitrage, 409±411risk analysis, 353risk arbitrage, 447±449speculative arbitrage, 473Short-term interest rate futures contract.See EurofuturesShort-term rolls, 398±402SPAN, 126, 127SPDRs, 53, 54Special quotation (SQ) price, 113, 127±129Speculative arbitrage, 459±498classical technical trading strategies,464, 465close-to-close return, 493±497close-to-open return, 487±493computational power, 463, 486convergence, 468±472, 497, 498discipline, 469dividends, 473DJI pairs, 481±485execution, 472®nancing, 472, 473opportunity, 463±465pro®tability, 465±468RD/SC, 474±480risk management, 473, 474short squeezes, 473Splits, 100±102, 252, 253SPLS-ODP failed merger, 439±443Sponsor, 239Spread, 175, 176SQ price, 113, 127±129Squeeze, 39n, 40, 52. See also ShortsqueezeStandard portfolio analysis of risk(SPAN), 126, 127
Standard valuation, 271Staples±Of®ce Depot failed merger,439±443Static hedge (®xed quantity), 31±38Statistical arbitrage, 460Stochastic simulation, 363, 364Stock dividend, 101nStock Exchange Electronic TradingService (SETS), 91nStock exchanges, 63±69, 91, 92Stock index futures, 115, 116Stock indices, 229±264. See also Indexarbitrageaddition/deletion standards, 240, 241capitalization-weighted index, 231concentration, 234±240continuity, 246±262corporate events, 249±262correlations, 262, 263de®nitions, 230±234disclosure, 241±243dividend yields, 233, 234dividends, 251, 252DJIA, 249, 250embedded indices, 262, 263futures hedging, 245, 246index trading, 244, 245major indices, 235, 236mergers and acquisitions, 253±262numerical continuity, 247price-weighted index, 231, 232splits, 252, 253sponsorship, 239±243total return index, 232, 233tradability, 247±249transparency, 240Stocks, 24±27, 63±106arbitrageur's major concern, 67borrowing/lending of securities,83±91cross listings, 72±75de®nitions, 64±67dividends, 76±82equity ®nancing, 89, 90fundamentals, 82, 83interruptions of trading, 92±94major exchanges, 63±69, 91, 92margin trades, 90outstanding number of, 97±106
INDEX
securities-driven lending, 85±88settlement, 67±72tax-driven lending, 88, 89trading rules/procedures, 91±97types of equity by country, 65, 67valuations, 283±288volatility, 92±97Stop-loss rules, 469, 470Stop-pro®t rules, 469, 470Straight reference, 127Structural differences, 9Sumitomo, 396±398Support and resistance, 464Swapsasymmetries, 185, 186de®ned, 147ELS, 147±149eurofutures, 216, 217foreign exchange, 217±221, 314±317interest rate. See Interest rate swapsISDA guidelines, 183npricing, 197±202risk management, and, 185valuation, 301±308zero coupons, and, 184, 185Synthetic futures, 149, 150System failure, 330, 341Tailing the hedge, 346nTakeovers. See Mergers andacquisitionsTax rebate, 78, 358Tax rebate pricing, 80Tax treaties, 79Taxesborrowing/lending of securities, 88,89dividends, 77±81®nancing structure, 90nJapan, 8, 9risk, 358TD, 70Technical trading, 16, 17, 460. See alsoSpeculative arbitrageTerm structure, 153n, 154Theoretical basis, 224, 371Theoretical value, 27±29, 275, 276forwards, 294FRAs, 312
507
futures, 291, 29230/360, 169TIBOR, 162Tick test, 95Tier 1 capital, 321Tier 2 capital, 321Tokyo Stock Exchange, 69Tom-next rate, 157Total return index, 232, 233Trade date (TD), 70Trading collars, 95, 96Trading costs/fees, 282, 317±320Trading halts, 92±94Trading rules/procedures, 91±97Trading the index, 244, 245Typical arbitrageurs, 9United Kingdomaverage SQ, 128futures exchange, 112, 118index arbitrage, 382open interest, 404, 407settlement (futures), 118settlement (stocks), 71stock exchange, 68United Statesauction reference, 128controls on excessive volatility, 94±96embedded indices, 263futures exchanges, 112, 118index arbitrage, 380, 381open interest, 403, 406, 407settlement (futures), 118settlement (stocks), 71stock exchanges, 68, 69, 92time basis, 170Up-tick rule, 94, 95V@R. See Value-at-risk (V@R)Valuations. See Financial valuationValue-at-risk (V@R), 359±365analytical method (RiskMetrics), 361,363, 364drawbacks, 363, 365historical method, 363, 364historical simulation, 363, 364stochastic simulation, 363, 364valuations, 278, 280Value date (VD), 70
508
INDEX
Volatility, 92±97, 328
Yield curve, 153n
WEBS, 54When-issued securities, 105Window dressing, 7nWorld Equity Benchmark Shares(WEBS), 54World equity markets, 63±69, 92, 93
Z transform, 18n, 476nZero coupons, 171±173, 184±194Zero-minus tick, 94n
A BOUT THE A UTHORStephane Reverre works for Leading Market Technologies, specializingin analytical tools for institutional investors. He is the former head ofindex arbitrage and quantitative trading for the Tokyo and later NewYork of®ces of SocieÂteÂ GeÂneÂrale, one of the largest French banks and aleader in the ®eld of equity derivative trading. A graduate of EÂcoleCentral in Paris as well as the Harvard Business School MBA program,Reverre has provided consulting services for software and tradingcompanies and has published numerous articles on equity arbitragein specialized magazines and publications.
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