TECH - Taiwan Semiconductor Arbitrage Trade Faces Challenges As US Stock Premium Hits 15-Year High: 'AI Boom Is Not Over' | Benzinga
The popular arbitrage trade involving Taiwan Semiconductor Manufacturing Co. (NYSE:TSM) is causing unexpected pain as the U.S. stock premium over its Taiwanese counterpart reaches a 15-year high.
What Happened: The premium of TSMC’s American depositary receipts over its Taiwan stock has surged to 22% this quarter, the highest average since 2009, Bloomberg reported on Monday. This surge is attributed to the U.S.’s growing enthusiasm for artificial intelligence.
Despite a 66% increase in ADRs and a 53% rise in Taipei shares this year, both are still trading below their 2021 valuation highs. The ADRs’ accessibility to foreign investors and their inclusion in various indices and exchange-traded products have contributed to their outperformance.
Arbitrage involves simultaneously buying and selling the same or similar asset in different markets to profit from minor price differences. It exploits short-term variations in the price of identical or similar financial instruments across different markets or forms.
"It's supply/demand dynamics," said Brian Freitas, founder of research firm Periscope Analytics. "Not all foreign investors can hold the Taiwan stock so they just prefer owning the ADRs. Plus there are some indices which only reference the ...