Question

6. LOL is a new ETF that gives exposure to the Canadian wireless providers Bell (BCE),
Rogers (RCI.B), TELUS (T). Trading in LOL shares remains slightly inefficient. Each
share of the ETF is constructed to represent 0.3 BCE, 0.3 RCI.B, and 0.4 T shares. Use
the following prices to describe an arbitrage opportunity,
BCE = 59.24
RCI.B = 66.90
T = 45.02
LOL = 56.00
a. Buy 3 BCE, 3 RCI.B and 4 T and sell 10 LOL. Keep $2.50
b. Sell 3 BCE, 3 RCI.B and 4 T and buy 10 LOL. Keep $1.50
c. Sell 3 BCE, 3 RCI.B and 4 T and buy 10 LOL. Keep $2.50
d. Buy 3 BCE, 3 RCI.B and 4 T and sell 10 LOL. Keep $1.50

Answer 1

As we can see, 10 shares of LOL are equivalent to 0.3*10 = 3 shares of BCE, 3 shares of RCI.B and 4 shares of T. So our net share holding in any of the given 4 cases will be 0. We just need to see which alternative gives the correct positive cash flow as stated for each option. So we calculate the net cash flow for each option as shown below:

In option d, the total amount received = -3 * 59.24 + (-3)* 66.9 + (-4)*45.02 + 10*56 = $1.50

So the only correct option among the given choices is option d which is the correct answer.