Skip to content

CFA Level I · CFA Level I Exam · Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives

An arbitrage opportunity is best described as a transaction that:

An arbitrage is a transaction that earns a riskless profit without any net investment. It is not simply a return equal to the risk-free rate, and it is not a risky excess return; it exploits a price discrepancy with no exposure and no capital required.

  1. Aearns a risk-free profit with no net investmentCorrect
  2. Bearns a return equal to the risk-free rate on invested capital
  3. Cearns a return above the market portfolio for the risk taken

Explanation

Arbitrage requires earning a riskless profit with no net outlay. A return equal to the risk-free rate is ordinary compensation for investing capital, and an above-market return for the risk taken describes alpha, which still carries risk.

Did you get it right without looking?

One question tells you little. A timed set on Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives shows your real accuracy, how long you take and where you lose marks.

Practise Arbitrage, Replication, and the Cost of Carry in Pricing DerivativesFree diagnostic mock

More Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives questions