Use the Information for the Question(s) Below

question 72

Multiple Choice

Use the information for the question(s) below.
An exchange traded fund (ETF) is a security that represents a portfolio of individual stocks. Consider an ETF for which each share represents a portfolio of two shares of International Business Machines (IBM) , three shares of Merck (MRK) , and three shares of Citigroup Inc. (C) . Suppose the current market price of each individual stock are shown below:

-Suppose that the ETF is trading for $424.50; you should

• A) sell the ETF and buy 2 shares of IBM, 3 shares of MRK, and 3 shares of C.
• B) sell the ETF and buy 3 shares of IBM, 2 shares of MRK, and 3 shares of C.
• C) buy the ETF and sell 2 shares of IBM, 3 shares of MRK, and 3 shares of C.
• D) do nothing, no arbitrage opportunity exists.

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Definitions:

Derivatives

Financial contracts whose value is based on the performance of an underlying asset, index, or interest rate, used for hedging risks or speculating.

Financially Sound

A description of an entity's state when it has stable financial health, showing both short-term liquidity and long-term solvency.

Financially Distressed

The situation in which a company or individual cannot meet or has difficulty paying off financial obligations.

Financial Risk

The equity risk that comes from the financial policy (i.e., capital structure) of the firm.