Derivatives - Derivatives Section 1
56. Which of the following statements is most accurate?
- Option : B
- Explanation : An arbitrage opportunity is an opportunity to make a profit at no risk with no capital invested.
57. If an arbitrage opportunity exists the:
- Option : A
- Explanation : When an arbitrage opportunity exists investors will trade quickly and prices will adjust to eliminate the opportunity.
58. An arbitrage opportunity is most likely to be exploited when:
- Option : A
- Explanation : An arbitrage opportunity is more likely to be exploited when the price the differential between assets is large or when large volume transactions can be executed.
59. An arbitrageur will least likely execute a trade when:
- Option : B
- Explanation : When the prices reflect law of one price, there is no arbitrage opportunity.
60. An arbitrage transaction is most likely to generate a profit when:
- Option : B
- Explanation : If two portfolios produce identical results but sell for different prices, an arbitrageur can buy the portfolio with the lower price and sell the portfolio with the higher price, generating a net inflow of funds at the start of the holding period.
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