Question

An ETF named ‘CBY’ gives exposure to three securities: one share of Levi Jeans Inc. priced at $45.55, one share of Western Belt Buckles Inc. priced at $24.20 and two shares of CGY Stampede Wear Corp. priced at $15.10. Currently the ETF is trading at $95. What is your best trading strategy?

Answer 1

1 Unit of ETF is worth 99.95 as shown in table below

Particulars	Quantity	Stock Price	Amount
levi Jeans	1	45.55	45.55
Western Belt	1	24.2	24.2
CGY Stampede	2	15.1	30.2
			99.95

Currently ETF "CBY" is trading at 95 (undervalued), It should ideally be trading at 99.95

Since ETF "CBY" is undervalued we will BUY CTF @ 95

We will simultaneously take a short position in the individual stocks in ETF getting 99.95

Thus we will be able to make an arnitrage profit of 99.95 - 95 = 4.95 per unit of ETF "CBY"