When One Puts on a Trade to Take Advantage of an Abnormal

question 14

Multiple Choice

When one puts on a trade to take advantage of an abnormal spread that one hopes will converge to the normal spread,which of the following is true?

• A) Spread trades only work when the underlying prices of the two securities increase together.
• B) A spread trade is always an arbitrage opportunity across time.
• C) A spread trade works regardless of whether the underlying prices of the two securities increase or decrease.
• D) A spread trade is always an arbitrage opportunity across space.
• E) Spread trades always have a positive probability of losing money.