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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
or portfolios to take
advantage of a price
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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.
- Spring '07