Which of the Following Is an Example of Arbitrage

question 38

Multiple Choice

Which of the following is an example of arbitrage?

• A) An inventor of a new hydrocarbon cracking technology based on palladium buys this metal knowing that its price will rise when the technology is adopted.
• B) A metals merchant is offered $108,000 in one year for $100,000 of palladium today, when the interest rate is 10%.
• C) An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit.
• D) A firm buys $250,000 of palladium today, with an option to sell it at $275,000 in one year if interest rates rise above 10%.

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Definitions:

Price/Earnings Ratio

A valuation ratio of a company's current share price compared to its per-share earnings, indicating the dollar amount an investor can expect to invest in a company in order to receive one dollar of that company’s earnings.

Interest Rates

The proportion of a loan charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.

Inflation

The rate at which the general level of prices for goods and services is rising, eroding purchasing power over time.

Recession

A significant decline in economic activity spread across the economy, lasting more than a few months, typically visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.