Summary: Both Citigroup and Berkshire Hathaway continue to violate the law of one price.
In previous posts (this is the most recent), I’ve pointed out that there are three ways you can purchase common shares of Citigroup:
Simple: Buy shares of common stock.
Preferred: Buy shares of preferred stock that will convert into common.
Synthetic: Use call and put options to replicate the financial returns of owning common stock.
In a perfect world, these three approaches would give nearly identical prices. That’s the law of one price.
Over the past few months, however, Citi securities have been breaking that law. Investors who have been buying common shares have been significantly overpaying relative to the values implied by the prices of the preferred stock and options.