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Arbitrage means taking advantage of temporary differences in market prices to make a profit. Assume two real estate companies, A and B, both operate in
Arbitrage means taking advantage of temporary differences in market prices to make a profit. Assume two real estate companies, A and B, both operate in New York area and focus on office properties. You have determined that Company A's shares have an intrinsic value of $20 per share but are trading at $22 per share, while Company B's shares are worth $25 per share but are trading at $22 per share. What would a rational investor (or an arbitrageur) do to take advantage of this price difference (no short-selling constraint and transaction fee)? Sell short company B's shares, buy the same number of company A's shares. Sell short company A's shares, buy the same number of company B's shares. Buy company A's shares only. Buy company B's shares only
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