Why are arbitrage opportunities short-lived?
A)Federal regulations will kick in to restrict trade and effectively shut the opportunity down.
B)Prices will fluctuate up and down as traders take advantage of the opportunity,resulting in the net present value (NPV)fluctuating between positive and negative values.
C)Once investors take advantage of the opportunity,prices will respond so that the buying and selling price become equal.
D)Arbitrage opportunities need a lot of information processing,which is very slow to arrive.
E)Investors will stop taking advantage of them for fear of being caught by regulators.

Question

Quizplus · Accepted Answer

When investors take advantage of an arbitrage opportunity, they buy the undervalued asset and sell the overvalued asset simultaneously. As a result, demand for the undervalued asset increases, causing its price to rise, while the supply of the overvalued asset increases, causing its price to drop. This causes the buying and selling prices to become equal, thereby eliminating the arbitrage opportunity. Therefore, arbitrage opportunities are short-lived.

Why Are Arbitrage Opportunities Short-Lived