Financial Risk Manager Part 1
Get started today
Ultimate access to all questions.
Define arbitrage as used in the context of security trading.
Other
Community
TTanishq
A
The exploitation of undervalued assets so as to increase returns.
B
The exploitation of security mispricing aimed at making risk-free profits.
C
The skill of accurately timing returns so as to obtain optimal profit from a security.
D
The exploitation of illegal trading channels aimed at making tax-free profits.
Explanation:
Explanation
Arbitrage in security trading refers to the exploitation of security mispricing aimed at making risk-free profits. This involves simultaneously buying and selling the same security in different markets to capitalize on price discrepancies. The key characteristics of arbitrage are:
- Risk-free nature: Arbitrage profits come from price differences, not from market movements
- Simultaneous transactions: Buying and selling occur at the same time
- Market efficiency: Arbitrageurs help maintain price consistency across markets
Why other options are incorrect:
Choice A: While exploiting undervalued assets can increase returns, this describes value investing rather than arbitrage. Arbitrage specifically targets price discrepancies between markets.
Choice C: This describes market timing strategies, which involve predicting price movements and carry risk. Arbitrage is risk-free and doesn't rely on timing.
Choice D: This describes illegal activities like tax evasion, which has no relation to legitimate arbitrage trading strategies.
Arbitrage plays a crucial role in financial markets by ensuring price efficiency and eliminating temporary pricing anomalies.
Comments
Loading comments...