The three indices – the S&P 500 Volatility Arbitrage Index, the S&P Currency Arbitrage Index and the S&P Long Only Merger Arbitrage Index – are the first in what will be a series of arbitrage indices launched by Standard & Poor’s in 2008, according to a press release.
According to the firm:
The S&P 500 Volatility Arbitrage Index seeks to model a common strategy that takes advantage of the difference between implied volatility and realized volatility. The index consists of receiving implied variance and paying realized variance of the S&P 500. Volatility arbitrage strategies are based on the tendency for implied volatility of an asset to be higher than realized volatility.
The S&P Currency Arbitrage Index seeks to model a carry trade strategy based on G10 currencies. It takes a long position in currencies that have a higher interest rate than the U.S. Dollar and a short position in currencies that have a lower interest rate than the U.S. Dollar. The weight of each currency is directly proportional to its interest rate spread and inversely proportional to its volatility.
The S&P Long Only Merger Arbitrage Index seeks to model a risk arbitrage strategy that exploits commonly observed price changes associated with mergers. The index is comprised of long positions in a maximum of 40 large and liquid stocks that are active targets in pending merger deals. A target company is considered for inclusion if at least 25% of the compensation to be paid for the target’s shares is in cash. Deals are screened on the basis of size, liquidity, premium, and exchange listing to ensure that the underlying positions are tradable and offer upside potential if the deal does close.
For more information about Standard & Poor’s family of arbitrage indices, check out http://www.standardandpoors.com/indices and click on “strategy indices” in the left navigation tab.