What is the price per share of the ETF in a normal market? (5 pts)
Price= 130*4+115*2+135*5=$1,425
If the ETF currently trades for $1,430 per share, what arbitrage opportunity is available? What trades should you implement in order to guarantee profit? Assume no transaction cost. (5 pts)
We can take the benefit of arbitrage opportunity by buying 4 shares of DIS, 2 shares of WMT, and 5 shares of IBM. We spend $1,425 to make an ETF and sell it at $1,430.
Profit: 1,430-1,425=$5
In part (b), assume the transaction cost is $5 per one share of ETF bought or sold and $1 per one share of stock bought or sold. Is there arbitrage? (5 pts)
There is no arbitrage opportunity now. In part (b) we have only $5 profit with no transaction cost, but in part (c) the transaction cost of $5 for ETF and $1 for stock will lead to a loss.
Loss: 1,430-1,425-5-1*(4+2+5)=-$11
If the ETF currently trades for $1,400 per share, what arbitrage opportunity is available? What trades should you implement in order to guarantee profit? Assume no transaction cost. (5 pts)
We can take the benefit of arbitrage opportunity by buying the ETF directly for $1,400 and sell the shares in this portfolio.
Profit: 1,425-1,400=$25
In part (d), assume the transaction cost is $5 per one share of ETF bought or sold and $1 per one share of stock bought or sold. Is there arbitrage? (5 pts)
