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:

Exit Price

The price that would be received to sell an asset or paid to transfer a liability.

Distress Sale

A distress sale occurs when property, stocks, or other assets are sold in an urgent manner, often at a loss, because of external pressures or financial hardship.

Forced Liquidation

The rapid sale of assets by a borrower who must sell these assets because of financial distress and cannot meet an obligation with cash flow.

Measurement Date

The specific point in time at which the value of an asset or liability is determined for accounting purposes, often used in reference to financial instruments or employee stock options.