CMFAS M8 Exchange-Traded Funds (ETFs) question: ETF creation/redemption arbitrage

CMFAS M8Exchange-Traded Funds (ETFs)

Which statement about ETF creation/redemption arbitrage is FALSE?

A At a premium, an AP buys units on the market and delivers them the underlying basket for a profit
B At a premium, an AP creates new units by delivering the basket and sells them on the market
C At a discount, an AP buys cheap units and redeems them for the more valuable basket
D AP arbitrage keeps the ETF's market price closely anchored to NAV

Show the answer and explanation

Answer: A. At a premium, an AP buys units on the market and delivers them the underlying basket for a profit

At a premium the AP creates units (delivering the basket) and sells them; the 'buys units and delivers the basket' description garbles this by reversing the flows, so it is the false statement. The others correctly describe the arbitrage.

Common mistake

Missing the reversed, nonsensical flow in the premium description.

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CMFAS M8 Exchange-Traded Funds (ETFs) question: ETF creation/redemption arbitrage

Answer: A. At a premium, an AP buys units on the market and delivers them the underlying basket for a profit

Common mistake

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CMFAS M8 Exchange-Traded Funds (ETFs) question: ETF creation/redemption arbitrage

Answer: A. At a premium, an AP buys units on the market and delivers them the underlying basket for a profit

Common mistake

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