simultaneous purchase and sale in different markets to achieve a profit
question
arbitrage makes sure you_____
answer
never lose money
question
main example of arbitrage
answer
gold market
question
you should buy ____ and sell _____
answer
low, high
question
in market equilibrium should there be an opportunity for profitable arbitrage?
-why? what would there be for former and latter?
answer
no
one could make profit by buying low (undervalued asset) and selling high (overvalued asset)
excess demand for former/ excess supply for latter
question
is there a condition that requires that the price of gold must be the same in other countries?
answer
no there is no arbitrage condition for this
question
when is an asset over/ under valued?
-what is the only value that matters?
answer
-overvalued- sell
-undervalued- buy
-relative value
question
what does the theory that there must be no opportunity for profitable arbitrage lead to
answer
derivatives
question
what is a derivative?
when will there be an opportunity for profitable arbitrage?
answer
value derived from the value of the underlying asset
-when the price of the derivative does not have a relationship to the price of the underlying asset
question
in asset market equilibrium what conditions are equal
-can we see this as an opportunity for arbitrage?
answer
the rate of return and present value conditions
-no
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