Question

The process of buying an underpriced security and selling an equivalent overpriced security until the prices converge is known as arbitrage.a. Trueb. False

Answer 1

The process of buying an underpriced security and selling an equivalent overpriced security until the prices converge is known as arbitrage. This statement is true.

What Is Arbitrage?

The arbitrage approach, used in foreign exchange trading, allows investors to lock in profits by simultaneously buying and selling the same security, good, or currency on two different marketplaces. By using this strategy, traders can profit from the disparities in pricing for the same asset across the two different regions that are represented on each side of the trade.

Arbitrage is the practice of purchasing an underpriced security and selling an equivalently-priced asset until the prices converge. Trading on illegal insider knowledge may result in abnormal profits even if the efficient market theory is accurate in a semi-strong sense.

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