Arbitrage linking futures prices to the index enabled portfolio insurance via cheap futures trading.

Evidence

The close, arbitrage-imposed link between the price of futures and the level of the underlying index made it possible to implement portfolio insurance by buying and selling futures, rather than by buying and selling stocks, at least so long as the portfolio to be insured was highly correlated with the S&P 500, as well-diversified U.S. stock portfolios would be. As noted in chapter 6, a futures position equivalent to a huge position in stock could be constructed by making margin deposits that were a small fraction of the value of the underlying stock. — Donald MacKenzie, An Engine, Not a Camera, 801

Categorization

• XREF: connects to: Arbitrage enforces a real link that anchors derivatives to underlying assets — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 781; Portfolio insurance is structurally equivalent to buying a put option on the portfolio. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 791; Portfolio insurance designed to limit losses can amplify market volatility. — Shapiro, Susan P., The Social Control of Impersonal Trust, 144 (+2 more)

Broader Connections

• Portfolio insurance designed to limit losses can amplify market volatility. #expands (0.82) — Shapiro, Susan P., The Social Control of Impersonal Trust, 144
• The arbitrage argument produces the Black-Scholes partial differential equation. #expands (0.75) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 95