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4. Suppose an ETF holds 500,000 shares of stock A and 1,000,000 shares of stock B. The per-share market prices of the stocks are $50
4. Suppose an ETF holds 500,000 shares of stock A and 1,000,000 shares of stock B. The per-share market prices of the stocks are $50 for A and $20 for B. There are 1,000,000 shares of the ETF outstanding. (That is, each ETF share represents 12 share of stock A and 1 share of stock B). a) What should the market price of the ETF shares be? b) Suppose the per-share market price of the ETF were $1 higher than what you calculated in part (a). How can an authorized participant earn an arbitrage profit using, for example, a creation unit of 100,000 shares of stock A and 200,000 shares of stock B. c) Suppose the per-share market price of the ETF were $3 below the price you calculated in part (a). What is the arbitrage strategy (for an authorized participant), again using, for example, a creation unit of 100,000 shares of stock A and 200,000 shares of stock B
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