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About This QuizYou love going to Sunday markets and garage sales. You especially love the idea of looking around for bargains at one venue and then reselling them at another, making yourself a nice, tidy profit. Did you know this form of trading has a name? It's called arbitrage and it's as old as time. Take the time now to answer everything you always wanted to know about arbitrage.
What element of risk is entailed in simple arbitrage?
In simple arbitrage, there's usually no risk at all.
What is another word for "arbitrageur"?
An arbitrageur is the same as a trader -- someone who buys an item for one price and sells it for another (higher) price.
A common example of arbitrage strategy is some people who trade on eBay and other:
Internet auction sites
Arbitrage strategy is regularly performed by some people on eBay as well as similar Internet auction sites.
In sports betting, how does arbitrage operate?
Two different bettors will place bets with two different bookies.
A bettor will bet with two different bookies, each of which gives different odds on the same sporting event.
In sports betting, one bettor might bet with two different bookies, each of whom offers different odds. This way, he'll make a profit, no matter who wins.
A bookie will give two different odds to two different bettors.
Where are you more likely to find types of arbitrage -- on the street or in a multi-million dollar corporation?
on the street
Actually, you'll find arbitrage everywhere: on the street with the small fry as well as among the big fish in the big-bucks industries.
in a multi-million dollar corporation
How are financial markets designed to discourage arbitrage?
There are signs and advertisements in every financial market discouraging this behavior.
People who engage in arbitrage within open financial markets are hounded by the law.
Securities are priced evenly in all trading arenas.
To discourage arbitrage, securities in financial markets are priced evenly.
What is the term for minor differences in financial markets?
They're called mispricings and they occur when there are small differences in financial markets for a short time.
If there is a mispricing, how does a trader make a profit?
He puts shares up for sale before the mispricing is noticed.
He buys the shares at the higher price and sells them quickly at the lower price.
He buys the shares at the lower price and sells them quickly at the higher price.
A fast-thinking trader will make his kill by buying the shares at the lower price and quickly selling them at the higher price.
All kinds of speculative arbitrage rely on techniques that magnify risk and reward for the investor. This is known as:
It's called leveraging. Speculative arbitrage uses all kinds of leveraging techniques to boost greater profit for the investor.
One type of speculative arbitrage is statistical arbitrage. In what context is it used?
where there are mispricings of convertible bonds
in equity markets
Statistical arbitrage is used in the context of equity markets, whereby data on statistical patterns are gathered over a period of time.
where there are mispricings in interest rate securities