Premium Buy and Sell Execution Levels
The "premium" (PREM) or "spread" is the difference between the stock index future fair value and the actual index level. As the derivative is based on the index, the two should normally have a very close relationship. If there is a sufficiently large difference the arbitraging program will attempt to buy the relatively cheap level (whether that is the basket of stocks which make up the index or the index future) and sell the relatively expensive product, making money from the price discrepancy. The fair value calculation takes into account the time to expiration of the future contract, the dividends received from holding all the stocks, and the interest cost of buying the stocks.
Read more about this topic: Program Trading, Index Arbitrage
Famous quotes containing the words premium, buy, sell, execution and/or levels:
“In taking out an insurance policy one pays for it in dollars and cents, always at liberty to discontinue payments. If, however, woman’s premium is a husband, she pays for it with her name, her privacy, her self-respect, her very life, “until death doth part.””
—Emma Goldman (1869–1940)
“What’s great about this country is that America started the tradition where the richest consumers buy essentially the same things as the poorest.”
—Andy Warhol (1928–1987)
“I will never again go to people under false pretenses even if it is to give them the Holy Bible. I will never again sell anything, even if I have to starve. I am going home now and I will sit down and really write about people.”
—Henry Miller (1891–1980)
“My weakness has always been to prefer the large intention of an unskilful artist to the trivial intention of an accomplished one: in other words, I am more interested in the high ideas of a feeble executant than in the high execution of a feeble thinker.”
—Thomas Hardy (1840–1928)
“The word which gives the key to the national vice is waste. And people who are wasteful are not wise, neither can they remain young and vigorous. In order to transmute energy to higher and more subtle levels one must first conserve it.”
—Henry Miller (1891–1980)