Question

If you could purchase IBM stock and simultaneously sell the stock for $5 more, you would be involved in one type of economic activity?

a. indifference principle

b. arbitrage

c. carry trade

d. marked to market

e. none of the above

Answer 1

Answer: (b) arbitrage

In general terms, arbitrage is the purchase and sale of an asset in order to profit from a difference in the asset's price between markets. It is a trade that profits by exploiting the price differences of identical or similar financial instruments in different markets or in different forms. Here also, there is the simultaneous buying and selling of IBM stock in the manner as mentioned, thus it is an example of arbitrage.

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