Question

Which of the following is an arbitrage opportunity?

A. The bank offers you a loan at 4% interest and a savings account that pays 5% interest.
B. Two stocks, one has expected return of 5%, the other 4%.
C. For every $1 you deposit today, the bank offers to pay you $1 in a year if the economy is bad and $2 in a year if the economy is good.
D. The bank offers you a loan at 5% interest and a savings account that pays 4% interest.

Answer 1

D. The bank offers you a loan at 4% interest and a savings account that pays 5% interest.

Step-by-step explanation:

Arbitration is a financial strategy that consists of the price difference between different markets on the same financial asset to obtain an economic benefit, usually without risk.

To perform arbitration, complementary operations (buy and sell) are carried out at the same time and wait for prices to adjust. The arbitration takes advantage of this divergence and obtains a risk-free gain. In other words, the arbitrajista is positioned short (sells) in the market with higher price and long (purchase) in the market with lower price. The benefit would come from the difference between the two markets.