SIE Exam Question 75: Answer and Explanation

Question: 75

What does security arbitrage involve?

• A. Simultaneously buying and selling both a stock and a security that may be converted into that same underlying stock
• B. Buying shares in a company that is being taken over or acquired while shorting shares in the company about to acquire them
• C. Simultaneously buying and selling the same security in two different markets to exploit the price difference between the two
• D. None of the above

Correct Answer: A

Explanation:

Security arbitrage involves the simultaneous purchase and sale of both a stock and a security that may be converted into that same underlying stock. Buying shares in a company that is being taken over or acquired, while shorting shares in the company about to acquire them, is risk arbitrage. Simultaneously buying and selling the same security in two different markets in order to exploit the price difference between the two is market arbitrage.