medium · Market Microstructure
An authorized participant (AP) observes that an S&P 500 ETF is trading at $500.50 on the exchange, while the underlying basket of 500 stocks has an aggregate NAV of $500.00 per share.
What action should the AP take to lock in an arbitrage profit?
- Buy ETF shares and sell S&P 500 futures to exploit the basis.
- Wait for the ETF price to revert to the NAV before taking any action.
- Buy the underlying stock basket and create new ETF shares to sell in the market.
- Sell the underlying stock basket and buy ETF shares to redeem for more stocks.
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