An Index Arbitrage Involves Buying the Cheaper Portfolio and Selling

question 12

Multiple Choice

An index arbitrage involves buying the cheaper portfolio and selling the more expensive portfolio where:

• A) the portfolios try to replicate the performance of two different but related stock indexes
• B) one portfolio consists of an index future while the other portfolio tries to replicate the performance of the underlying index
• C) one portfolio consists of an index option while the other portfolio tries to replicate the performance of the underlying index
• D) one portfolio consists of an index future while the other portfolio consists of an index option,where both derivatives are written on the same underlying index
• E) None of these answers are correct.

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Definitions:

FIFO

"First In, First Out," an inventory valuation method where the first items placed into inventory are the first sold.

LIFO

An accounting method for valuing inventory that assumes the last items produced or purchased are the first ones sold.

Ending Inventory

The total value of goods available for sale at the end of an accounting period, calculated as the beginning inventory plus purchases minus cost of goods sold.

Overstated

A term used to describe financial statements that report a value or condition as being higher than it actually is.