“Riding” a bubble and convergence trading are opposite from each other in terms of actions they...

“Riding” a bubble and convergence trading are opposite from each other in terms of actions they entail, although both aim at achieving abnormal returns (True or False?)

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Expert Solution

True:

In finance and trading, convergence and divergence are terms used, Convergence means coming together, while divergence generally means moving apart. These terms are used to describe the directional relationship of two stock prices, or indicators. The absence of convergence is an opportunity for arbitrage.

In derivatives market convergence describes the phenomenon of the futures price and the cash price of the underlying commodity moving closer together over time. Convergence will happen when, theoretically, an efficient market will not allow something to trade for two prices at the same time.

So riding a bubble and convergence trading both have the same aim at achieving abnormal return but in terms or action both are opposite.

jeff jeffy answered 2 years ago

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