Question

Suppose Big Bank offers an interest rate of 8.5​% on both savings and​ loans, and Bank A offers an interest rate of 9.0​% on both savings and loans. a. What profit opportunity is​ available?

Answer 1

Answer:

C) Take a loan from big bank at 8.5% and save the money in Bank A at 9.0%

Explanation:

If you take a loan from Big Bank at 8.5%, and then deposit that money into Bank A in order to receive 9% interest rate, you will be earning 0.5%. This is a form of arbitrage, since you are simultaneously obtaining a "cheap" loan and immediately depositing the money at another bank that pays a higher interest rate.

Arbitrage is a type of trading, usually involves trading securities and commodities, and is basically represents earning money on market inefficiencies. Some argue that arbitrage is the base of all types of trading, but the difference is that arbitrage would be the most efficient type of trading. If you buy a stock and hold it for a certain period, that qualify as arbitrage, but if you buy and sell the same stock simultaneously and make a profit out of it, then that is arbitrage but it is also being a very efficient trader.

In this case, you could actually be making money without investing a cent.