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Technology Stocks : Semi Equipment Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Berk who wrote (15423)	5/26/2004 6:14:10 PM
From: Jess Beltz	Read Replies (2) \| Respond to of 95616

As I understand it, there are no-arbitrage bounds for example on say an S&P 500 futures contract. That is, it is fairly easy to construct the portfolio of stocks that replicates the underlying index to the futures contract. Thus, if the futures settlement price wanders to far from the actual index (say above it) one could short the futures contract and simultaneously go long the replicating portfolio, pocketing the "arb" profit. Notice however, that the value of the replicating basket of stocks and the value of the index (or more precisely the difference between the two) can be computed precisely at any point in time. However, with an individual stock, you would need a similar replicating instrument. An interesting idea might be to try to use a synthetic equity (like being long a call and short a put on the same stock) however the options are time dependent. Not knowing what the values will be in say 6 months prohibits this. I can't think of any replicating instrument one could use to establish arbitrage bounds on an individual stock. I also do not know of any studies that have pursued the idea. Hope this helps. Jess.