Question

You are at a trading card convention, and observe that for a certain card, a dealer is willing to buy the card for $100, and sell the card for $120. At the same convention, a different dealer quotes a BID-ASK spread of $125-$140 for the very same card. Which statement is false: _______
a. There is an arbitrage opportunity at the convention.
b. The market for trading cards is an inefficient market.
c. If the dealers ran into each other, they would happily trade with each other.
d. If you had to pay a 2% tax when you bought the card, you could not make a profit from this situation after taking transactions costs into account.

Answer 1

Answer:

Option A

Explanation:

In simple words, arbitrage opportunity refers to the condition under which an individual is able to make risk less profit, that is, profit without investing its own capital. In the given case, there is a clear arbitrage opportunity.

One can borrow the card from the first with the promise to pay him $120 and sell the card to the second dealer for $125. With the payment received from the second dealer we can pay the first dealer his promised amount and make a profit of $5.