Explanation : The law of one price occurs when participants in the market engage in
arbitrage activities so that identical assets sell for the same price in
different markets. B refers to arbitrage and C does not account for identical
Explanation : Arbitrage opportunities exist when the same asset or two equivalent
assets, producing the same result, sell for different prices. A and B are
incorrect because they do not define arbitrage opportunities.
Explanation : The criticism to derivatives is that they are ‘too risky’ especially to
investors with limited knowledge of complicated instruments. Derivative
markets do provide price information but also lower transaction costs.
Moreover, default risk is not existent in all instruments. With exchange
traded instruments such as options and futures there is virtually no default