Question

An arbitrage opportunity arises whenever:

a. one sells assets (usually securities) that have been borrowed from a third party (usually a broker) with the intention of buying identical assets back at a later date at a lower price to return to the lender.

b. exchange rates fluctuate.

c. one can buy something at a low price in one location, resell it at a higher price in a different market, and thus make a profit.

d. transaction costs are zero and prices are identical between countries.

e. the prices of comparable goods rise in all countries.

Answer 1

The key is to understand the difference between speculation and arbitrage. While speculation is carried out on the basis of anticipation of prices/exchange rate fluctuating over a certain period of time and involves a larger risk, the buying and selling under arbitrage is essentially carried out simultaneously in two different markets, hence involves lower risk. Therefore the correct option is

c. one can buy something at a low price in one location, resell it at a higher price in a different market, and thus make a profit.