Test the arbitrage possibilities in Hong Kong option market by using box spread strategy

Abstract

The main idea of this paper is to test whether there is arbitrage opportunity in Hong Kong index options market. This paper uses the put-call parity relationship and the box spread strategy to do the test. In order to make the test more logical, reasonable and close to reality, there are some assumptions made by this paper. The data that the study will use is also close to those assumptions. To test the existence of the arbitrage opportunity, 3658 pairs of data are used which include 1829 long hedge positions and 1829 short hedge positions. A T-test was used to test the existence of the arbitrage opportunities. The paper did the test separately for the long hedge position and short hedge position. The final conclusion of this paper is that, there are significant arbitrage opportunities in the Hong Kong options market, but the arbitrage opportunities only really exist for very small probabilities.