If a firm engages in risk management to capture arbitrage profits,what is it easy to overlook?
A)the additional credit risk it assumes
B)the cost is greater than the benefit
C)the market risk is high
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

When a firm engages in risk management to capture arbitrage profits, it may overlook the additional credit risk it assumes. This is because the firm may focus too much on the potential profits from the arbitrage opportunity and ignore the potential risks, such as counterparty default or credit downgrades. It is important for the firm to carefully analyze the credit risk involved and take appropriate measures to mitigate it. The cost-benefit analysis and market risk assessments are also important but they do not specifically relate to the additional credit risk.

If a Firm Engages in Risk Management to Capture Arbitrage