Arbitrage

In: Business and Management

Submitted By aryaan
Words 464
Pages 2
1.I will buy share of Seagate and short share of Veritas. As we can get cheap Veritas shares embedded in Seagate share. If all MBA do this the price of Seagate share will rise and price of Veritas share will fall and they will converge to one price and there will be no opportunity of arbitrage. 2.The price of both the company is different as law of one price is violated as high tax for transaction limits the arbitrage opportunity allowing difference in stock price to exist. The law of one price states that same asset cannot trade at different price. Both the companies are into to relatively different business, Seagate is into hardware industry and Veritas in software industry. As hardware industry in which Seagate is very volatile and it requires high investment due to which it was not favoured by the investors and analysts which is driving down the price. The vertical integration it carried out brought about high R&D and capital expenses like high manufacturing cost. This caused decrease in the value of Seagate stock as it had high fixed cost so in downturn it is difficult to pay off high fix cost. Only cost associated with the software industry is the investment into human capital which fluctuation is not much in comparisons to the market in which Seagate was, moreover software market was growing market and investors preferred investing in it. Moreover as high tax for transaction limits the arbitrage opportunity, thus share prices depends on the law of supply and demand, as prices are set where the number of shares demanded equals the number of shares supplied. 3.Seagate has been receiving numerous inquiries from the concerned stockholders and it is becoming more difficult to provide proper incentive to employees. Increase in the market value of Veritas stake meant that the Seagate stock is…...

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