Equities · Index
PD3 Arbitrage Pricing
Session timeline
Briefing
Trading30 min
Debrief
The case
Two stocks and an ETF built from them trade together.
Objective
Trade the gap between the ETF and the two stocks it holds. Assessed on profit and loss.
What it shows
- Arbitrage: the ETF is worth one AAA plus one BBB, and trades apart from that for a time.
- Three legs to a trade: buy the cheap side, sell the dear.
- Why the gap is small and closes quickly.
Watch out for
- Trading one leg and leaving the others.
- A gap that is only the spread and pays nothing.
- Other students closing the gap first.
Who takes part
- Trader — every student. Trades AAA, BBB, and an ETF that holds one of each.
Class size
Ten to forty students in one role. The gap closes faster with a larger class.
Concepts
- Arbitrage
Roles
Trader
You trade two stocks, AAA and BBB, and an ETF.
- The ETF holds one AAA and one BBB.
- Assessed on profit and loss.
Instruments
| Ticker | Name | Market | Students can |
|---|---|---|---|
| AAA | Stock A | Continuous trading | Trade it |
| BBB | Stock B | Continuous trading | Trade it |
| ETF | ETF (1 AAA + 1 BBB) | Continuous trading | Trade it |
In the tracks
This case is not part of a track. Browse the tracks