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Question

Which of the following best describes the concept of arbitrage in finance?

A The act of engaging in foreign currency arbitration with a counterparty. Correct Answer Incorrect Answer
B The practice of exploiting differences in prices of the same asset between two or more markets in order to make a profit. Correct Answer Incorrect Answer
C The process of generating income through the buying and selling of foreign currencies. Correct Answer Incorrect Answer
D The practice of investing in multiple asset classes to reduce overall risk. Correct Answer Incorrect Answer
E All of the above. Correct Answer Incorrect Answer

Solution

Arbitrage is a trading strategy used in finance where an investor takes advantage of price differences of the same asset between two or more markets. The investor buys the asset in the market where it is undervalued and immediately sells it in the market where it is overvalued, making a profit from the difference in prices. The key to successful arbitrage is to act quickly, as the price difference is usually small and the opportunity to make a profit is fleeting.

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