The stock PolarBear.com trades on both the South Pole Stock Exchange and the Nor

Question

The stock PolarBear.com trades on both the South Pole Stock Exchange and the North Pole Stock Exchange.

(a) Suppose the price on the North Pole is $18. What does the No-Arbitrage Condition say about the price on the South Pole? (Assume no trading costs.)

(b) Suppose the price on the North Pole is $18 and the price on the the South Pole is $17? How can you make an arbitrage profit? (Assume no trading costs.)

(c) Suppose that the price on the North Pole is $18, that buying or selling on the North Pole costs $2, and that buying or selling on the South Pole is free. What does the No-Arbitrage Condition say about the price on the South Pole?

Explanation / Answer

Hi, Please find the answer as below: a) No arbitrage condition states that the opportunity for making gain without taking increase risks. It would mean that stock polarbear.com is trading at $ 18 on the south pole. b) Arbitrage profit can be made by buying the stock at 17 on south pole and selling it at 18 on north pole. c) South Pole Price would continue to be 18. Thanks, Aman

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