The differences between the theoretical and real prices of a futures contract may indicate whether it is overpriced or underpriced. If these deviations are not justified by transaction costs, index arbitrage opportunities will appear. In this paper we will price the IBEX-35 index futures contract in a frictionless market. By relaxing the strong constraints of a frictionless market, we develop a band that is defined by the theoretical prices that would be obtained if a direct or reverse cash and carry index arbitrage were made. The width of this band would be dictated by the transaction costs of the most favorably situated arbitrageurs. After the no arbitrage opportunities window is obtained, we study the arbitrage opportunities using minute by minute data on the IBEX-35 index futures contract from 2-21-94 to 5-20-94.

Keywords: theoretical price, arbitrage, transaction costs, stock index.