Case study: Dual share class pairs trading

- [Instructor] Now that we have a basic understanding…of what we call pairs trading, that is trying to trade…different securities based on the relationship between them,…let's turn to another type of pairs trade.…In this case, in columns B and C, we have the stock prices…for Viacom Class A shares and Class B shares.…Now, as the names imply, Viacom Class A and Class B…both refer to exactly the same company,…and in fact they both give you ownership…in the same underlying firm and…the same share of the profits.…

As a result, in theory, these two stocks…ought to have exactly the same value.…In practice, though, because Viacom B shares have…a larger float, that is there's more shares outstanding,…they tend to trade more frequently…then Viacom Class A shares do.…So there's a relationship between these…two classes of shares, we might want to…try and capitalize on that relationship.…Now, just as before, I've put together a ratio…and it looks like, on average, the relationship…between Viacom Class A and Class B,…averages about 0.99, so on average,…