A Study of Arbitrage Efficiency Between the FTSE-100 Index Futures and Options Contracts

Paul Draper, Joseph K. W. Fung*

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    18 Citations (Scopus)
    11 Downloads (Pure)


    Despite the importance of the London markets and the significance of the relationship for market makers, little published research is available on arbitrage between the FTSE-100 Index futures and the FTSE-100 European index options contracts. This study uses the put-call-futures parity condition to throw light on the relationship between options and futures written against the FTSE Index. The arbitrage methodology adopted in this study avoids many of the problems that have affected prior research on the relationship between options or futures prices and the underlying index. The problems that arise from nonsynchroneity between options and futures prices are reduced by the matching of options and futures prices within narrow time intervals with time-stamped transaction data. This study allows for realistic trading and market-impact costs. The feasibility of strategies such as execute-and-hold and early unwinding is examined with both ex-post and ex-ante simulation tests that take into consideration possible execution time lags for the arbitrage trade. This study reveals that the occurrence of matched put-call-futures trios exhibits a U-shaped intraday pattern with a concentration at both open and close, although the magnitude of observed mispricings has no discernible intraday pattern. Ex-post arbitrage profits for traders facing transaction costs are concentrated in at-the-money options. As in other major markets, despite important microstructure differences, opportunities are generally rapidly extinguished in less than 3 min. The results suggest that arbitrage opportunities for traders facing transaction costs are small in number and confirm the efficiency of trading on the London International Financial Futures and Options Exchange.

    Original languageEnglish
    Pages (from-to)31-58
    Number of pages28
    JournalJournal of Futures Markets
    Issue number1
    Early online date8 Nov 2001
    Publication statusPublished - Jan 2002

    Scopus Subject Areas

    • Accounting
    • Business, Management and Accounting(all)
    • Finance
    • Economics and Econometrics


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