9780321818171_berk_ch03

This is a case where that old adage buy low sell high

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Unformatted text preview: g 1 million ounces at these prices, you would make $100 million with no risk or investment! This is a case where that old adage, “Buy low, sell high,” can be followed perfectly. Of course, you will not be the only one making these trades. Everyone who sees these prices will want to trade as many ounces as possible. Within seconds, the market in New York would be flooded with buy orders, and the market in London would be flooded with sell orders. Although a few ounces (traded by the lucky individuals who spotted this opportunity first) might be exchanged at these prices, the price of gold in New York would quickly rise in response to the excess demand, and the price in London would rapidly fall in response to the excess supply. Prices would continue to change until they were equalized somewhere in the middle, such as $1250 per ounce. This example illustrates an arbitrage opportunity, the focus of this section. Arbitrage arbitrage The practice of buying and selling equivalent goods or portfolios to take advantage of a price difference. arbitrage opportunity Any situ...
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This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at University of Arizona- Tucson.

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