An Exchange Traded Fund (ETF) is a security that represents a portfolio of individual stocks. ETFs can be purchased on the stock exchanges like individual stocks. Assume that you can exchange the ETF for the underlying stocks and that you can form an ETF unit using the underlying stocks. In addition, assume that you can purchase and short-sell stocks and ETFs without any limitations.The Lonestar ETF consists of 5 shares of Exxon Mobil (XOM), 8 shares of AT&T (T), and 1 share of Texas Instruments (TXI). The current bid and ask prices of the three stocks and the Lonestar ETF are listed below:| Security | Bid Price | Ask Price ||---------------------------|-----------|-----------|| Exxon Mobil (XOM) | $36.05 | $36.08 || AT&T (T) | $28.87 | $28.90 || Texas Instruments (TXN) | $156.75 | $156.80 || Lonestar ETF | $569.60 | $569.70 |**Are there any arbitrage opportunities? If yes, summarize the exact transactions that you suggest to perform the arbitrage. If not, explain why there are no arbitrage opportunities.**To identify potential arbitrage opportunities, calculate the total buying and selling costs of equivalent positions between the ETF and its underlying stocks using bid and ask prices. Arbitrage exists if a discrepancy allows for a risk-free profit.

If there is a difference in prices of two similar things at two different market places, it is known…

Answered: Are there any arbitrage opportunities?…

Are there any arbitrage opportunities? If yes, summarize the exact transactions that you suggest to perform the arbitrage. If not, explain why there are no arbitrage opportunities.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Related questions

Q: A certain sum of money P draws interest compounded continuously. If at a certain time there are Po…

A: FV in case of continuous compounding is: FV = PV * e^rt

Q: Which of the following have high return and low Liquidity? a. demand deposit account b. saving…

A: Account is referred as the record or an arrangement through which a customer’s financial assets are…

Q: at is a balance sheet? Why is it useful? What is the difference between a pro forma balance sheet…

A: The financial information is very important now days and it is very important to give the…

Q: Could you explain the relationship between money, credit, and financial firms? Explain

A: A financial institution (FI) is a firm that deals with financial and monetary transactions such…

Q: What is the value of equity? And how to answer that question with only information on assets and…

A: Valuation is referred as the quantitative method to estimate the fair value of an assets or a…

Q: Recognize the link between money and credit? Explain

A: Money is defined as the financial medium used to facilitate transactions between parties. Money…

Q: How is investment banking different from retail and corporate banking? Explain in a flowchart.

A: Retail Banking is the type of Banking which provides banking services or financial services to the…

Q: why is there a need to use different financial tools and techniques?

A: Financial statement analysis- It is the process of reviewing and analyzing financial statements to…

Q: Please answer in detail How can someone manipulate a balance sheet to make it in his favor?

A: Manipulation of financial statements and other sorts of accounting fraud are still issues for…

Q: (1) How does getting a secured loan using accounts receivable as collateral differ from factoring?…

A: Hi student Since there are multiple questions, we will answer only first question. Sales means…

Q: Explain fraudulent financial reporting.

A: The examples of fraudulent financial reporting are: • Modifying the time of recording sales to…

Q: novation cau

A: Financial markets exhibit asymmetric information in any transaction in which one of the two parties…

Q: What is the ultimate objective of financial management? Question 7 options: to ensure the…

A: Financial management is the process of planning, organizing, controlling, and monitoring the…

Q: 4. How can interest earned or paid on short-termsecurities or loans be incorporated in the…

A: Introduction: Interest earned is nothing but an amount earned by a firm on bank accounts or other…

Q: Liquidity

A: A firm’s liquidity position plays a very important role in ensuring its survival in the market.

Q: With example, differentiate between a physical settlement and a cash settlement in the derivatives…

A: A derivative market is a financial market in which financial derivatives such as futures contracts,…

Q: Do you think that the so-called equity theories of accounting are really theories in the scientific…

A: Yes. equity theories of accounting are really theories in the scientific sense. the real owners are…

Q: Which of the following transactions would result in an increase in capital employed? A. Paying a…

A: Capital Employed means amount of capital being invested in the business. This is also known as…

Q: what is the job of a financial intermediary*? What might happen if they fail to do their job? *as…

A: A financial intermediary is an institution that serves as a middleman in a financial transaction…

Q: What are the impacts on your financial statement if you account the transactions not accurately

A: Financial Reporting refers to the recording of the financial transactions of a company for a desired…

Q: Define the terms, or give short explanations. -arbitrage -business risk -call -cash…

A: Arbitrage: The practice of profiting from price discrepancies in various markets with no risk…

Q: What are the advantages and disadvantages of the impact of accounting on digital currencies?

A: Cryptocurrencies are digital currencies that can be used to purchase various types of products and…

Q: why a organisation should consider hedging net payables or net receivables with currency options…

A: Answer: Hedging is nothing but an investment risk management strategy that reduces or controls the…

Q: Statement Of Changes in Equity

A: Statement of Changes in Equity is a part of financial statements of an entity that shows the flow of…

Q: By chance do you know the answer for the financing activities?

A: Cash flow statement has 3 parts :Cash flow from Operating ActivitiesCash flow from Investing…

Q: What is the key advantage of using electronic payments instead of currency or checks? A. Lower…

A: Opportunity costs refers to the benefits that are foregone when a firm implements any project.

Q: Accounting Can you explain The Advantages of the Gold Standard?

A: Introduction: The "gold standard" is a monetary system that directly correlates the value of a…

Q: What are the disadvantage of embracing digital currencies in investment or financial transaction?

A: Digital money is money that only exists in digital form. This is neither a tangible item like…

Q: What is the difference between a nominal account and a real account?

A: Nominal Account: These are the accounts that pertain to Incomes (or Revenues) and Expenses. Thus,…

Q: Would you prefer using negotiable instruments as a form of payment rather than using traditional…

A: A negotiable instrument is an archive that ensures installment of a particular measure of cash to a…

Q: 1. What kinds of transactions make up the activity in the finance and investment cycle?

A: Hello. Since your question has multiple parts, we will solve the first question for you. If you want…

Q: Could you explain the relationship between money, credit, and financial institutions

A: Money is the center of the universe. Money is being used to buy and sell goods and services..…

Q: What is Fair Value Accounting? 2. What are the factors contributing toward the trend of fair value…

A: What is Fair Value Accounting? Fair value accounting is a financial reporting method where assets…

Q: Is excess liquidity a serious issue? Would insufficient liquidity be much worse? Please discuss

A: Excess liquidity means that the company is holding excess assets in cash or liquid instruments that…

Q: The financial system serves as the main venue to invest excess funds by savers. This is made through…

A: Answer: True

Q: Trading in derivatives

A: Derivatives are the type of contracts that force the value of an underlying asset. These contracts…

Q: Which of the following statements best describes financial instruments? a. All financial instruments…

A: financial instrument are asset tha can be traded in the financial market. a. finicial asset are not…

Q: the non-arbitrage conditons holds if: A: if no one conducts arbitrage at all B: exactly because…

A: The term arbitrage is refer to the when a same type of assets is brought from one market and sold…

Question

An Exchange Traded Fund (ETF) is a security that represents a portfolio of individual stocks. ETFs can be purchased on the stock exchanges like individual stocks. Assume that you can exchange the ETF for the underlying stocks and that you can form an ETF unit using the underlying stocks. In addition, assume that you can purchase and short-sell stocks and ETFs without any limitations.

The Lonestar ETF consists of 5 shares of Exxon Mobil (XOM), 8 shares of AT&T (T), and 1 share of Texas Instruments (TXI). The current bid and ask prices of the three stocks and the Lonestar ETF are listed below:

| Security | Bid Price | Ask Price |
|---------------------------|-----------|-----------|
| Exxon Mobil (XOM) | $36.05 | $36.08 |
| AT&T (T) | $28.87 | $28.90 |
| Texas Instruments (TXN) | $156.75 | $156.80 |
| Lonestar ETF | $569.60 | $569.70 |

**Are there any arbitrage opportunities? If yes, summarize the exact transactions that you suggest to perform the arbitrage. If not, explain why there are no arbitrage opportunities.**

To identify potential arbitrage opportunities, calculate the total buying and selling costs of equivalent positions between the ETF and its underlying stocks using bid and ask prices. Arbitrage exists if a discrepancy allows for a risk-free profit.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1: INTRODUCTION

VIEW

Step 2: SOLUTION

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Off-Balance Sheet Activities do not have a direct impact on the financial stability or risk of a FI. True False
1. Which of the following is a function of every financial market? A) It determines the level of interest rates. B) It allows common stock to be traded. C) It allows loans to be made. D) It channels funds from lenders-savers to borrowers-spenders. 2. Securities are for the person who purchases them, but they are for the person/firm who sells them. A) assets; liabilities B) liabilities; assets C) income; liabilities D) liabilities; expenses 3. Which of the following is/are money market instrument(s)? A) Negotiable certificates of deposits B) Common stock C) T-bonds D) 4-year maturity corporate bond 4. Who has voting rights at a shareholders' meeting? A) All common stock owners. B) Common stock owners who own more than 1% of the company. C) Only the company's managers. D) All preferred stock owners. 5. These are investments where shareholders become the owners of the portfolio of the account. These portfolios of securities could be made up of equity securities or debt securities. A)…
What are the several components of a deposite institution 's liquidity plan? How can such a plan help a deposite institution reduce liquidity shortages?
Which of the following statements best describes financial instruments? Answer a. All financial instruments are a means of payment b. Financial instruments can transfer resources between people but not risk c. Financial instruments can transfer resources and risk between people d. Financial instruments can transfer risk but not resources between people
Financial Institutions have Off-Balance-Sheet acitivities mainly (Commitment Loans; Letter of Credits; Loans slold, and Derivative contracts). What are the potential advantages and risks exposed of these activities?
What factors are frequently ignored in financial analysis? Why?
What are some advantages of matching the maturities of claims against assets with the lives of theassets financed by those claims? Is it feasible for afirm to match perfectly the maturities of all assetsand claims against assets? Why might a firm deliberately mismatch some asset and claim maturities?
An example of asymmetric information in financial markets is that A. the borrower knows more than the lender. B. the lender knows more than the borrower. C. the borrower has a long-term goal while the lender has a short- term goal. D. the borrower and lender have different expectations about financial markets.
The following are various forms of arbitrage. 1)Fixed income arbitrage 2)Risk arbitrage 3)Covered interest arbitrage 4)Regulatory arbitrage 5)Location arbitrage. Explain how each of the above forms of arbitrage remove discrepancies in pricing of currencies
is gambling passive income
What is the asset-liability time mismatch that all banks face?
What is "Intermediation" and why do we use Financial Intermediaries, instead of direct finance, for the most part?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS