1.2 Suppose Hewlett Packard (HP) stock iscurrently trading on the NYSE with a bi

Question

1.2 Suppose Hewlett Packard (HP) stock iscurrently trading on the NYSE with a bid price of $28.00 and an askprice of $28.10. At the same time, a NASDAQ dealer posts abid price for HP of $27.85 and an ask price of 27.95. a) Is therean arbitrage opportunity in this case? If so how would youexploit it? b) Suppose the NASDAQ dealer revises his quotes to abid price of $27.95 and an ask price of $28.05. Is there anarbitrage opportunity now? If so how would you exploit it? c)what must be true of the highest bid price and lowest ask price forno arbitrage opportunity to exist?

Explanation / Answer

HP Stock is currently trading on theNYSE:   Bid Price      $28.00

                        NASDAQdealer posts a        BidPrice        $27.85

                                                                           AskPrice        $27.95

(a)    Yes, in this case there is an arbitrageopportunity exists. Here the NYSE is currently trading the BidPrice is $28, but the NASDAQ dealer’s Bid Price is $27.85.Here some price difference is exists i.e. $0.15.This price differential can then be exploited to make a profit bybuying from the lower costing sources and selling back immediatelybefore the value discrepancy is corrected.

(b) Suppose the NASDAQ dealer revises his quotes to a           BidPrice         $27.95

Yes, here also arbitrage opportunity exists. The exact pricedifferential is $0.05

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