medium · Market Microstructure
An authorized participant (AP) notices that the SPY ETF is trading at $500.50 on the NYSE Arca, while the underlying basket of stocks has a Net Asset Value (NAV) of $500.20.
Which sequence of actions will the AP take to capture the arbitrage?
- Buy the underlying stocks, create ETF shares, and sell them on the exchange.
- Sell SPY futures and buy the ETF shares.
- Short the underlying stocks and buy SPY shares.
- Buy SPY shares on the exchange and redeem them for the underlying stocks.
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