What Is Arbitrage And Calculation Of Net Present Value


1. Peter has a business opportunity that requires him to invest $10000 today, and receive $12000 in one year. He can either use $10000 that he already has for this investment, or borrow the money from his bank at an interest rate of 10%. However, the $10000 he has right now is needed for urgent repairs to his home, repairs that will cost at least $15000 if he delays them for a year. What is the best alternative for Peter out of the following choices?

A. No, since the net present value (NPV) of the investment, should he take it, is less than the net present value of the home repairs if he delays them for one year.
B. Yes, since he can borrow the $10000 from a bank, repair his home, invest $10000 in the business opportunity, which, since it has a NPV > 0 will mean he will still come out ahead after repaying the loan.
C. Yes, since the net present value (NPV) of the investment is greater than zero he can invest the $10000 in the business opportunity, and then next year use this money plus the benefit from this money to make the necessary home repairs.
D. Yes, since the net present value (NPV) of the investment should he take it, is greater than the net present value of the home repairs if he delays them for one year.

2. Which of the following is an example of arbitrage?

A. An interior of a new hydrocarbon cracking technology based on palladium buys this metal knowing that its price will rise when the technology is adopted.
B. A metals merchant is offered $108,000 in one year for $100,000 of palladium today, when the interest rate is 10%.
C. An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit.
D. A firm buys $250,000 of palladium today, with an option to sell it at $275,000 in one year if interest rates rise above 10%.


These short questions belong to Finance. The 1st question is about a person assessing to put his money in an investment or to go for his home repairs. The 2nd question is about arbitrage..

Total Word Count 87

Download Full Solution


  • HWA

    this is a very good website

  • HWA

    I have 50 questions for the same test your page is showing only 28

  • HWA

    hi can you please help or guide me to answer my assignments. thanks

  • HWA

    hi can anyone help or guide me to my assignments. thanks

  • HWA

  • HWA

    This solution is perfect ...thanks

  • HWA

    Hello Allison,I love the 2nd image that you did! I also, had never heard of SumoPaint, is something that I will have to exolpre a bit! I understand completely the 52 (or so) youtube videos that you probably watched. Sometimes they have what you want, sometimes they don't! However, it is always satisfying when you are able to produce something that you have taught yourself. Great job!Debra 0 likes

  • HWA

    Perfect bank of solution. 

  • HWA

    great !

  • HWA
    Paul Brandon-Fritzius

    thanks for the quick response. the solution looks good. :)

  • HWA
    tina Johnson

    thnx for the answer. it was perfect. just the way i wanted it. 

  • HWA

    works fine.