Question

If an arbitrage opportunity​ exists, an investor can act quickly in the hope of making a

risk minus free profit.

True

False

Answer 1

Arbitrage, in its truest sense refers to buying an asset from one market and simultaneously selling the same asset in another market. To explain arbitrage in the easiest way, let's look at the following example:

Imagine that the price of 1 kg Orange in your local market in $3.50. However, the price of 1 kg Orange in a market 3 blocks away is $3.80. Using this price difference, you can a profit by buying 1 kg orange from your local market ($3.50) and sell it in the market 3 blocks away for $3.80. With this, you would make a profit of $0.30 per kg. ($3.80-$3.50)

In Financial market too, price differences between assets may arise, providing investors with a profit chance. However, one of the main costs to consider are the brokerage costs, which may eat up the investor gains. In cases when an arbitrage opportunity exists with respect to a merger, (where in the price of target company increases and that of the acquirer decreases) there would exist a substantial amount of risk, in case the merger does not get through.

Otherwise, in this sense, it is TRUE that if an arbitrage opportunity exists, an investor can act quickly in the hope of making a risk miss free profit.