Arbitrage: If only we can short sell here in the Philippines

An arbitrage is the practice of taking advantage of the difference in price of a single asset.

Example:

Ideally two markets are necessary in order to have an arbitrage play. However, last October 5, 2012, opportunity for an arbitrage play was available for people that can short shares.

Swift Foods, Inc. (SFI) shares suddenly went up to close with a gain of 47% from October 4, 2012 closing price or .215 while Swift Foods, Inc. Convertible Preferred (SFIP) closed only at P1.80. What does that imply? It’s an arbitrage opportunity.

SFI and SFIP are not fundamentally different. SFIP is convertible anytime to 10 SFI common shares. Therefore, SFIP should be priced at 2.15 last Friday.[1]

How to profit through arbitrage?

For those who can short shares, one can buy SFIP at 1.80 while simultaneously shorting SFI at .215. You then have to file a request to your broker to convert SFIP shares to SFI. The process would be certification/upliftment of SFIP shares and then forward it to the Company for conversion. After 2 weeks you will be provided with corresponding SFI common shares and you may apply it to your short shares.

Profit through Speculation

According to ANC, SFI’s price went up due to rumors of Century Canning taking over the company (this was subsequently clarified by RFM[2]) but assuming that SFI managed to turn around their business that a higher valuation will be reasonable, you may prefer to buy SFIP at a substantially lower price than SFI. After you accumulated a satisfactory number of SFIP shares, you may convert it to common shares.

 

Comments

Provided that you are allowed to short by your broker, you can have riskless profit through arbitrage. Holding SFIP and converting it to SFI common might expose you with the risk of capital loss during the time you are in the process of conversion but will be a wise move should the underlying asset (in this case, SFI) is incrementing in value.

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. This article is made for the purpose of presenting arbitrage.

Disclosure: No SFI / SFIP shares.

Source:

  1. Amended 2011 annual report, Note 14, Preferred Shares, p. 83, http://www.pse.com.ph/resource/corpt/2012/SFI_A17A_Dec2011.pdf
  2. Disclosure re: ownership structure of SFI, http://www.pse.com.ph/resource/disclosures/2012/pdf/dc2012-7280_RFM.pdfb
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