describe and investment scenario in which arbitrage exists. in describing your example clearly explain what is meant by the term arbitrage.

Financial Math

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Expert Solution

Arbitraging means an opportunity for the investor in which he can buy the similar securities on two different Markets and make a rate of return so it is reflecting that there are various markets on which similar securities are traded and there is a price discrepancy between the securities so arbitrageurs are always trying to capitalise upon that price discrimination between two different markets for the similar security.

Arbitraging will be existing in those scenarios when there will be different prices upon two different stock exchanges for the similar stocks or it will also existing when there will be two different prices for similar securities in two different markets at the exact point of time.

Like, if Reliance is trading on National Stock Exchange on 1100 and Reliance trading on Bombay Stock Exchange on 1110, so, arbitrageurs will be trying to exploit the gap of 10 rupees.

Arabitraging is a violation of Efficient market hypothesis and it is reflecting that there are incorrect pricing on different exchanges for similar stocks.

jeff jeffy answered 2 years ago

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