Moto376, thanks for this question. Hmmm, maybe in general we should assume that arbitrage is riskless, in a textbook sense, like here. I guess the original question regarding the tech bubble is perhaps that that wasn’t arbitrage in a sense since it involved taking a risk (albeit with very small probability of needing to cover the buyout). Do others agree that perhaps, on the exam, we should assume arbitrage would be risk-free, unless specifically we’re asked about such extraordinary infrequent item as that mentioned regarding the tech bubble? Or perhaps another way of looking at this is that a seemingly riskless arbitrage opportunity may in fact have a non-zero risk associated with it.
I would think the first question is not really accruate… Moto’s question is accruate and b should be the ans. For the first question, by only shorting a stock, should not really be considered artbitrage opportunity as arbitrage should be instintanous… and have 3 legs to each transaction… Example: If you see a mispricing you could/should 1. Short the stock 2. Buy the option 3. Invest the proceeds at RFR The first question should be more to do with valuation analysis…