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What interest rates are used in practice in a stock index / futures arbitrage? I've seen cases, when the assumed rate is 3 months LIBOR, but does it mean, that everyone who does the arbitrage can borrow cash at it (or anyone, who can't is automatically out of the game)?

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The most prudent way (imho, from a practitioner's point of view) is to chose the rate that applies to the expected lifetime of the trade, which would at the outset be the time to expiration of the futures contract. I am saying that because when you look at the futures contract mechanics the arbitrage is constructed in the way of borrowing/lending in the underlying until the contract is settled and you are obliged to either receive or deliver the underlying (cash or else underlying directly). Chose the rate the large players can borrow/lend at, not the rate you can deal at. Of course above logic does not mean one cannot square the position pre-futures expiration.

Having said that I believe markets are efficient enough to preclude you from deriving a risk free profit from futures arbitrage. Even most sell side investment banks' trading systems are not agile enough to arbitrage futures contracts.

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