Asked by mahesh likhe on Jun 26, 2024
Verified
Violation of the spot-futures parity relationship results in ________.
A) fines and other penalties imposed by the SEC
B) arbitrage opportunities for investors who spot them
C) suspension of delivery privileges
D) suspension of trading
Spot-Futures Parity
A financial theory stating that the spot and future prices of a commodity, currency, or security will converge at the futures contract's expiration.
Violation
An instance of failing to comply with a set rule, regulation, or standard.
Arbitrage Opportunities
Situations where a profit can be made with no risk by simultaneously buying and selling assets in different markets or forms due to price discrepancies.
- Elucidate the notion of arbitrage and its relevance in the context of futures markets.
Verified Answer
AC
Anjli ChahalJun 30, 2024
Final Answer :
B
Explanation :
Violation of the spot-futures parity relationship creates an opportunity for investors to earn profits through arbitrage. They can buy the asset in the spot market and sell it in the futures market (or vice versa) to take advantage of the price differences. Therefore, option B is the correct answer. The other options are not applicable or too severe for this violation.
Learning Objectives
- Elucidate the notion of arbitrage and its relevance in the context of futures markets.