EDDIE for Discovering Arbitrage Opportunities a

The prices of the option and futures of a stock both reflect the market’s expectation of futures trends of the stock’s price. Their prices normally align with each other within a limited window. When they do not, arbitrage opportunities arise: an investor who spots the misalignment will be able to buy (sell) options on one hand, and sell (buy) futures on the other and make risk-free profits. In this paper, we focus on put-callfutures parity arbitrage opportunities. The upper bound of a futures bid price, denoted by Fbt, is given by: Fbte –ra(T–t) ≤ Cat – Pbt + Xe –rb(T–t) + TC (1) Here, T is the expiration date and t is today, i.e. T–t is the remaining time to maturity; Cat is the option’s call premium at the ask, Pbt is the option’s put premium at the bid. X is the exercise price for the option. TC is the transaction cost. ra is the interest rate on the borrowing to finance the futures. rb is the interest rate to lend. If condition (1) is violated then the arbitrageur will be able to make a risk free profit equal to: Fbte –ra(T–t) – [Cat – Pbt + Xe –rb(T–t) + TC]> 0 (2) When condition (1) is violated, a short arbitrage profit can be realized by shorting futures and protecting it by a synthetic long futures position by (i) buying a call option, (ii) shorting a futures option, and (iii) borrowing the present discounted value of the futures price and lending the same for the exercise price [9]. Historical data suggest that option and futures prices on the LIFFE Market (London) occasionally do no