Derivatives - Derivatives Section 1

Avatto>>CFA Level 1>>PRACTICE QUESTIONS>>Derivatives>>Derivatives Section 1

57. If an arbitrage opportunity exists the:

  • Option : A
  • Explanation : When an arbitrage opportunity exists investors will trade quickly and prices will adjust to eliminate the opportunity.
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58. An arbitrage opportunity is most likely to be exploited when:

  • Option : A
  • Explanation : An arbitrage opportunity is more likely to be exploited when the price the differential between assets is large or when large volume transactions can be executed.
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59. An arbitrageur will least likely execute a trade when:

  • Option : B
  • Explanation : When the prices reflect law of one price, there is no arbitrage opportunity.
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60. An arbitrage transaction is most likely to generate a profit when:

  • Option : B
  • Explanation : If two portfolios produce identical results but sell for different prices, an arbitrageur can buy the portfolio with the lower price and sell the portfolio with the higher price, generating a net inflow of funds at the start of the holding period.
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