Question 1

On Commodity Exchange A it is possible to buy and sell crude oil at $117 per barrel,while on Commodity Exchange B crude oil can be bought and sold at $118 per barrel.If there are transaction costs of 1% when buying or selling on either exchange,what is the net effect of buying a barrel of oil on Exchange A and selling it on Exchange B?
A)-$1.35
B)-$0.17
C)$0.99
D)$1.01

Accepted Answer

The cost on Exchange A is $117 + 1% of $117 = $118.17. The revenue on Exchange B is $118 - 1% of $118 = $116.82. The net effect is $116.82 - $118.17 = -$1.35.

Question 2

Use the table for the question(s)below.
Consider the following prices from a McDonald's Restaurant:
 
-A McDonald's Big Mac value meal consists of a Big Mac sandwich,large Coke,and a large fry.Assuming that there is a competitive market for McDonald's food items,at what price must a Big Mac value meal sell to insure the absence of an arbitrage opportunity and uphold the Law of One Price?
A)$4.08
B)$4.38
C)$5.47
D)$5.77

Accepted Answer

The Law of One Price states that identical goods should sell for the same price in a competitive market. The price of the Big Mac value meal should equal the sum of the individual prices of the Big Mac sandwich, large Coke, and large fry. Assuming the given options represent the total of these individual prices, $5.47 is the correct price to prevent arbitrage opportunities.

Question 3

You see on Craigslist that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300.Is this an arbitrage opportunity?
A)No. ,because the market for a used XBOX 360 is not the same as the market for a new XBOX 360.
B)No,because the market for a used XBOX 360 is a competitive market.
C)Yes,because the market for a used XBOX 360 is a competitive market.
D)Yes,because the market for a used XBOX 360 is not the same as the market for a new XBOX 360.

Accepted Answer

This is not an arbitrage opportunity because the market for a used XBOX 360 is not the same as the market for a new XBOX 360. Even though the prices are different, the two markets are not directly comparable. The used XBOX 360 may appeal to consumers who are looking for a cheaper option or who do not care about having the latest features, while those looking for a new XBOX 360 are likely willing to pay more for the latest version. Therefore, the price differential is not necessarily a true arbitrage opportunity.

Question 4

Walgreens Company (NYSE: WAG)is currently trading at $48.75 on the NYSE.Walgreens Company is also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50.Does an arbitrage opportunity exist and,if so,how would you exploit it and how much would you make on a block trade of 100 shares?
A)No,no arbitrage opportunity exists.
B)Yes,buy on NASDAQ and sell on NYSE,make $25.
C)Yes,buy on NYSE and sell on NASDAQ,make $25.
D)Yes,buy on NASDAQ and sell on NYSE,make $250.

Accepted Answer

B) Yes, buy 100 shares @ 48.50 and sell 100 shares @ 48.75 = $25.00.

Question 5

How does arbitrage help the Law of One Price?

Accepted Answer

The answer of How does arbitrage help the Law of...

Question 6

Which of the following is an example of arbitrage?
A)An inventor of a new hydrocarbon cracking technology based on palladium buys this metal knowing that its price will rise when the technology is adopted.
B)A metals merchant is offered $108,000 in one year for $100,000 of palladium today,when the interest rate is 10%.
C)An investor,seeing that the price of palladium on the metals exchange in two different countries is slightly different,buys on one and sells on the other to make a profit.
D)A firm buys $250,000 of palladium today,with an option to sell it at $275,000 in one year if interest rates rise above 10%.

Accepted Answer

Arbitrage involves buying and selling the same asset in different markets to take advantage of price discrepancies. In this case, the investor is buying palladium at a lower price in one market and selling it for a higher price in another market to make a profit, which is an example of arbitrage. Options (answer D) involve contracts that give the buyer the right, but not the obligation, to buy or sell an asset at a specified price, which is not the same as arbitrage. The scenarios in A and B involve making predictions or taking on risk, which are also not the same as arbitrage.

Question 7

You are watching TV late one night and see an ad from Ronco for the Dial-o-matic food slicer.You learn that the Dial-o-matic sells for $29.95.But wait,there's more! Ronco is also including in this deal a set of Ginsu steak knives worth $10.95 and another free gift worth $7.95.Assuming that there is a competitive market for Ronco items,at what price must Ronco be selling this three item Dial-o-matic deal to insure the absence of an arbitrage opportunity and uphold the Law of One Price?

Accepted Answer

The answer of You are watching TV late one night...

Question 8

Which of the following statements regarding the Law of One Price is INCORRECT?
A)At any point in time,the price of two equivalent goods trading in different competitive markets will be the same.
B)One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value (NPV),we can use any competitive price to determine a cash value,without checking the price in all possible markets.
C)If equivalent goods or securities trade simultaneously in different competitive markets,then they will trade for the same price in both markets.
D)An important property of the Law of One Price is that it holds even in markets where arbitrage is not possible.

Accepted Answer

This statement is incorrect because the Law of One Price requires the possibility of arbitrage if prices are not the same in different markets. If arbitrage is not possible, then the Law of One Price may not hold.

Question 9

The State Bank offers an interest rate of 5.5% on savings and 6% on loans,while the Colonial Bank offers 6.5% on savings and 7% on loans.Which of the following is the LEAST likely outcome of such a situation?
A)The State Bank would experience a surge in demand for loans.
B)The Colonial Bank would experience a surge in demand for deposits.
C)The State Bank would experience a fall in demand for deposits.
D)The Colonial Bank would experience a surge in demand for loans.

Accepted Answer

The answer of The State Bank offers an interest rate...

Question 10

A backhoe can dig 150 feet of trench per hour and costs $500 per hour to hire and operate.A ditch digger can dig six feet of trench per hour.Based on this information,what is the most a ditch digger can charge for per hour when digging ditches?
A)$20 per hour
B)$25 per hour
C)$3.33 per hour
D)$83.33 per hour

Accepted Answer

The answer of A backhoe can dig 150 feet of...

Question 11

Which of the following best explains why you cannot use the price of rolled oats at a local supermarket as the competitive market value of rolled oats?
A)You can buy the oats at the price posted by the store,but the store will not buy oats from you for the same price.
B)The posted prices of oats can vary widely between grocery stores,even within the same local area.
C)Grocery stores mark up the prices of their oats up to make a profit.
D)Grocery stores typically sell oats in different packaging,which results in different prices within the same store.

Accepted Answer

The price at a local supermarket only reflects the price that consumers are willing to pay for rolled oats at that particular store, but it does not reflect the market value of rolled oats, which is determined by the interaction of supply and demand across all buyers and sellers of rolled oats. The supermarket may have special deals, discounts or markups on rolled oats that do not reflect the true market value. Furthermore, the supermarket has the power to set the prices it wants for its products, but consumers do not have the power to negotiate prices with the store or influence the market value of rolled oats as a whole. Thus, the market value of rolled oats is not accurately represented by the price at a single retailer.

Question 12

A 2008 Toyota Camry can be bought in Buffalo,NY,for $18,720.The same model Camry can be purchased across the Canadian border in Hamilton,ON.If cars could be freely traded across the border,what would be the expected price of a 2008 Toyota Camry in Hamilton in Canadian dollars,given that $1 U.S.is equal to $0.98 Canadian?
A)$18,345
B)$18,720
C)$19,102
D)$20,212

Accepted Answer

We need to convert the price of the Camry in Buffalo from USD to CAD using the given exchange rate:

18,720 USD * 0.98 CAD/USD = 18,345.60 CAD

Therefore, if cars could be freely traded across the border, we would expect the price of the Camry in Hamilton to be approximately $19,102 CAD. The closest option is choice C.

Question 13

If the exchange rates,after fees,in Tokyo are ¥1000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171,which of the following would you expect to occur?
A)a surge in conversion of dollars to yen in Tokyo
B)a surge in conversion of euros to yen in Tokyo
C)a surge in conversion of euros to dollars in Paris
D)a surge in conversion of euros to yen in Paris

Accepted Answer

In Paris, €1 = $1.5, while in Tokyo, €1 = $9/¥1000. Therefore, it is more profitable to convert euros to yen in Paris and then convert the yen to dollars in Tokyo.

Question 14

Like other metals,uranium 308 is traded in competitive markets like the New York Metals Exchange.Which of the following would most likely value a given weight of uranium 308 the most?
A)a power station that uses uranium 308 to produce electrical energy
B)a metals trader who stockpiles and sells actual physical quantities of uranium 308
C)a speculator who buys and sells uranium 308 on the market without ever using the metal
D)All buyers and sellers would have the same value for 250 pounds of uranium.

Accepted Answer

The answer of Like other metals,uranium 308 is traded in...

Question 15

Which of the following statements regarding arbitrage and security prices is INCORRECT?
A)We call the price of a security in a normal market the no-arbitrage price for the security.
B)In financial markets it is possible to sell a security you do not own by doing a short sale.
C)When a bond is underpriced,the arbitrage strategy involves selling the bond and investing some of the proceeds.
D)The general formula for the no-arbitrage price of a security is Price(security)= PV(all cash flows paid by the security).

Accepted Answer

When a bond is underpriced, the arbitrage strategy involves buying the bond and investing some of the proceeds, not selling the bond.

Question 16

Advanced Micro Devices (NYSE: AMD)is currently trading at $20.75 on the NYSE.Advanced Micro Devices is also listed on NASDAQ and assume it is currently trading on NASDAQ at $20.50.Does an arbitrage opportunity exist and,if so,how would you exploit it and how much would you make on a block trade of 1000 shares?

Accepted Answer

The answer of Advanced Micro Devices (NYSE: AMD)is currently trading...

Question 17

Use the table for the question(s)below.
Consider the following prices from a McDonald's Restaurant:
 
-A McDonald's Big Mac value meal consists of a Big Mac sandwich,large Coke,and a large fry.Assume that there is a competitive market for McDonald's food items and that McDonald's sells the Big Mac value meal for $4.79.Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one value meal?
A)Yes,buy a value meal and then sell the Big Mac,Coke,and fries to make arbitrage profit of $0.68.
B)No,no arbitrage opportunity exists.
C)Yes,buy a Big Mac,Coke,and fries,then sell a value meal to make arbitrage profit of $1.09.
D)Yes,buy a Big Mac,Coke,and fries,then sell a value meal to make arbitrage profit of $0.68.

Accepted Answer

If the individual items (Big Mac, Coke, fries) cost more than $4.79 when purchased separately, you can buy the value meal and sell the items individually for a profit.

Question 18

Why are arbitrage opportunities short-lived?
A)Federal regulations will kick in to restrict trade and effectively shut the opportunity down.
B)Prices will fluctuate up and down as traders take advantage of the opportunity,resulting in the net present value (NPV)fluctuating between positive and negative values.
C)Once investors take advantage of the opportunity,prices will respond so that the buying and selling price become equal.
D)Arbitrage opportunities need a lot of information processing,which is very slow to arrive.

Accepted Answer

Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal. This equalizing effect, known as the "arbitrage correction," eliminates the opportunity for further profit. Therefore, arbitrage opportunities are short-lived.

Question 19

Diwali Airlines has a contract that gives them the opportunity to purchase up to 10,000,000 gallons of jet fuel at $2.00 per gallon.The current market price of jet fuel is $2.26 per gallon.Divali believes they will only need 6,000,000 gallons of jet fuel.What is the value of this opportunity?
A)$1,560,000
B)$2,600,000
C)$1,040,000
D)$9,040,000

Accepted Answer

The answer of Diwali Airlines has a contract that gives...

Question 20

"If equivalent investment opportunities trade simultaneously in different competitive markets,then they must trade for the same price in both markets."
What do we call the above statement?
A)the Net Present Value rule
B)the Law of One Price
C)the Valuation Principle
D)the time value of money

Accepted Answer

The statement is referring to the Law of One Price, which states that identical goods should have the same price in different markets when trade is costless. It is a fundamental principle of economics and finance, and is commonly used in arbitrage strategies. The other answer choices are not relevant to the statement.

Quiz 3: Time Value of Money: An Introduction

You see on Craigslist that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300.Is this an arbitrage opportunity?

How does arbitrage help the Law of One Price?

Which of the following is an example of arbitrage?

Which of the following statements regarding the Law of One Price is INCORRECT?

The State Bank offers an interest rate of 5.5% on savings and 6% on loans,while the Colonial Bank offers 6.5% on savings and 7% on loans.Which of the following is the LEAST likely outcome of such a situation?

A backhoe can dig 150 feet of trench per hour and costs $500 per hour to hire and operate.A ditch digger can dig six feet of trench per hour.Based on this information,what is the most a ditch digger can charge for per hour when digging ditches?

Which of the following best explains why you cannot use the price of rolled oats at a local supermarket as the competitive market value of rolled oats?

If the exchange rates,after fees,in Tokyo are ¥1000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171,which of the following would you expect to occur?

Like other metals,uranium 308 is traded in competitive markets like the New York Metals Exchange.Which of the following would most likely value a given weight of uranium 308 the most?

Which of the following statements regarding arbitrage and security prices is INCORRECT?

Why are arbitrage opportunities short-lived?

Diwali Airlines has a contract that gives them the opportunity to purchase up to 10,000,000 gallons of jet fuel at $2.00 per gallon.The current market price of jet fuel is $2.26 per gallon.Divali believes they will only need 6,000,000 gallons of jet fuel.What is the value of this opportunity?

"If equivalent investment opportunities trade simultaneously in different competitive markets,then they must trade for the same price in both markets." What do we call the above statement?