Recent musings at Blessed by the Potato about BMO’s 2.99% closed 5-year mortgage offering made me wonder about the possibility of running an arbitrage with a mortgage and a GIC. Outlook Financial offers a 5-year GIC at 3.10%. It would seem that if you owned your home outright you could take out a mortgage, put the proceeds in a GIC, and make a free 0.11% per year for 5 years. On a $250,000 mortgage, this would be a total of about $1375. This won’t make you rich, but it’s not trivial. There are a number of potential problems here. For one, the fine print on the BMO web page includes “If we require you to obtain an appraisal, the appraisal fee would increase your APR.” So, you may not be able to get 2.99%. Another potential problem is hidden compounding assumptions. In Canada, most mortgage rates assume semi-annual compounding. This means that 2.99% is really 1.495% every 6 months. This compounds out to 3.012% per year. I was once offered a variable mortgage by BMO where ...

My former employer Entrust Inc.’s stock is trading for $1.90 even though they have agreed to let Thoma Bravo buy them for $1.85 per share. What is going on that makes people pay $1.90 now to get $1.85 later? Do they expect deflation? This is clearly a case where the market thinks it knows something that I don’t know. Perhaps investors hope that another suitor will come along and pay a higher price. I don’t know of any other interested company, but who knows. This creates a reverse version of the usual takeover arbitrage. In the normal case where a stock trades below the takeover price, an investor who is confident that the takeover will go through buys stock to later sell it at the higher price. In this case, the investor who is confident that the takeover will go through can short Entrust stock and later buy it back when the takeover happens. However, I’m not confident enough about what will happen to try any form of arbitrage.

In yesterday’s post, I explained that Horizon BetaPro’s double exposure ETFs don’t give double the return of the index they are based on . One reason for this is the daily rebalancing of the doubled exposure as explained by Preet Banerjee in this post . Even without this daily rebalancing, the return would not be exactly double because leverage always comes with a cost. The simplest way to get leverage is to borrow money. Instead of investing $10,000 in an index, you could borrow an additional $10,000, and invest $20,000 in the index. This way, you double your returns. Well, not quite double your returns. You have to pay interest on the borrowed $10,000. This raises the question, is there any way to truly double your returns without paying any additional costs? We can show that the answer is no because it would create an arbitrage opportunity. Arbitrage basically means a risk-free way to make money. Suppose that an investment exists that gives double the returns of an ind...