Forum Archive Index - February 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Johnny,

>
>
>Could someone help me to understand why this would happen today - 
>FFS goes up 1 cent to 27c and at the same time FFSPA goes down 1 
>cent to 25c, aren't they supposed to be the same?
>
>
I guess if there was any proof needed that the 'efficient market 
theory' doesn't work all the time this is it.   You are correct of 
course so this is one of those occasions where theoretically you can 
make 'free money' out of the market.

Now if this was the USA someone like Warren Buffett would be in 
buying 'call' options for FFSPA, and at the same time writing put 
options for FFS.  He would make sure the expiry date for each 
was far enough into the future so that when the price of FFS and 
FFSPA did come together as is inevitable he could cash in both 
options and pocket the difference in the price you see today. 

This is a good example of how arbitrage can work I think, although I 
don't trade options myself so will stand to be corrected if I have it 
wrong.   The only flaw in this paln is that, being New Zealand, I 
don't think there is much of a market in 'put' options, so I don't 
think this little scheme would work. SNOOPY 


 
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