Question

Which of the following demonstrates an arbitrage opportunity?

1) Buying and selling the same (or similar) goods until a profit is made
2) Buying a currency with the belief that its value will appreciate in the near future
3) Investing in an economy that is experiencing rapid economic growth
4) Buying a good in one market and selling the exact same good in another market at a higher price

Answer 1

An arbitrage opportunity occurs when a good can be bought in one market and sold in another market at a higher price, taking advantage of price differences.

Step-by-step explanation:

Arbitrage is the process of buying a good in one market and selling the exact same good in another market at a higher price, taking advantage of price differences. In the context of currency exchange rates, arbitrage occurs when a currency is worth more in terms of other currencies, leading to opportunities for profit.

For example, if a U.S. dollar is worth $1.30 in Canadian currency, then a car that sells for $20,000 in the United States should sell for $26,000 in Canada. If the price of cars in Canada were much lower than $26,000, then some U.S. car-buyers would convert their U.S. dollars to Canadian dollars and buy their cars in Canada. This demonstrates an arbitrage opportunity as the buyer can purchase the same car for a lower price in one market and sell it for a higher price in another market.

By exploiting arbitrage opportunities, market participants help align prices and exchange rates across different markets over time.