Why Are Arbitrage Opportunities Short-Lived

question 23

Multiple Choice

Why are arbitrage opportunities short-lived?

• A) Arbitrage opportunities need a lot of information processing, which is very slow to arrive.
• B) Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net present value (NPV) fluctuating between positive and negative values.
• C) Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal.
• D) Financial market regulations will kick in to restrict trade and effectively shut the opportunity down.

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Definitions:

Disposable Income

The amount of money that individuals or households have available to spend or save after income taxes have been deducted.

Autonomous Consumption

The level of consumption that occurs when income is zero, representing the amount that needs to be consumed to sustain a basic standard of living.

Disposable Income

The financial pot allocated for households to manage their savings and expenditures after income tax deductions.

Autonomous Consumption

The level of consumption spending that occurs when income is zero, representing the expenditures that consumers must make even when they have no income.