Can you make a profit in the event of price convergence

Reference no: EM132027205

Question: Pair trading.

Suppose the current price ratio of pair of stocks in the energy sector (PA1/PB1) is 3 which is below its normal level of 5.

Can you make a profit in the event of price convergence at time 2 by shorting an arbitrary number X of shares of stock B for each share of stock A longed? If so, please prove it. If not, what would be the required range of X that would result in a profit in the event of price covergence at time 2?

Reference no: EM132027205

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