An ETF's premium

A Nifty ETF has iNAV ₹125.40 and a creation unit of 50,000 units. For a creating market maker, basket costs are 0.15%, the creation fee 0.03%, carry 0.02% and the ETF half-spread 0.05%. For a redeeming one, basket sale costs are 0.135%, the redemption fee 0.03%, carry 0.02%, the half-spread 0.05% and stamp duty on buying units 0.015% (illustrative). (a) Compute $C_c$, $C_r$ and the no-arbitrage band (6B.26). (b) The ETF trades at a mid price of ₹125.90. Compute the market maker's profit per unit and per creation unit from creating and selling. (c) An international ETF whose creations are suspended trades at 18% above iNAV. An investor buys. A month later creations reopen and the premium falls to 0.5% with the index unchanged. Compute her return. (d) Use Proposition 6B.9.1 to explain why the premium in (c) was not arbitraged away, and why the lower edge of the band still held.