Question

In: Finance

Consider the following prices from a McDonald's Restaurant: Big Mac Sandwich - $2.99 Large Coke -...

Consider the following prices from a McDonald's Restaurant:

Big Mac Sandwich - $2.99
Large Coke - $1.39
Large Fry - $1.09

A McDonald's Big Mac Extra Value Meal® consists of a Big Mac Sandwich, Large Coke, and a Large Fry. Assume that there is a competitive market for McDonald's food items and that McDonald's sells the Big Mac value meal for $4.79. Does an arbitrage opportunity exist and if so how would you exploit it? How much would you make on one extra value meal?

a.

Yes, buy a Big Mac, Coke, and Fries then sell the Extra Value Meal® to make an arbitrage profit of $0.68.
b.

Yes, buy the Big Mac Extra Value Meal® and then sell Big Mac, Coke, and Fries to make arbitrage profit of $0.68.
c.

None of the answers are correct.
d.

No, no arbitrage opportunity exists.
e.

Yes, buy Big Mac, Coke, and Fries then sell the Extra Value Meal® to make an arbitrage profit of $1.09.

Solutions

Expert Solution

prices from a McDonald's Restaurant given in question are

Big Mac Sandwich - $2.99
Large Coke - $1.39
Large Fry - $1.09

McDonald's Big Mac Extra Value Meal® consists of a Big Mac Sandwich, Large Coke, and a Large Fry, price of which is $4.79.

Price of a Big Mac Sandwich, large coke and large fry ,when bought individually, taken together will be ($2.99+1.39+1.09)=$5,47

But Price of Extra Value Meal® consisting of Big Mac Sandwich, Large Coke, and a Large Fry is $ 4.79.

Thus, arbitrage opportunity exists. Arbitrage is an opportunity when something is bought at a lower price and sold at a higher price. Therefore Arbitrage Profit will be $(5.47-4.79)=$0.68.

Thus, Option (b) is correct.

jeff jeffy answered 2 years ago
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