Question

Which of the following about the risk of arbitrage is correct?

I: In theory, arbitrage is riskless because it is a long-short hedged position.

II: in theory, it is riskless because eventually price has to go back to fundamentals. There is no uncertainty on this outcome.

III: In reality, even if eventually price will go to fundamentals, arbitrageurs maybe forced out of the market because of the risk of margin call.

IV: In reality, if lenders do not dare to lend enough capital to arbitrageurs, then arbitrageurs may not have enough capital to push price back to fundamentals. Price could always be wrong, thus making the arbitrage position not riskless.

II and III only
		I and III only
		I, II, III, IV
		I, II, and III

Answer 1

Arbitrage is risk less because eventually it is believed that price has to go back to their fundamentals and there is no certainity on this outcome. It is a play on the difference of price.

Arbitrage price in reality will go to fundamentals arbitrageurs may still be forced out of the market because there is always a risk of the margin call and if the margin call is triggered arbitrageurs position is squared off.

Other statements are false as arbitrage is not riskless because it is a long-short hedged position.

Correct answer is option ( A)II and III only.